Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.
A) $200
B) $150
C) $100
D) $50

Question

Quizplus · Accepted Answer

The dividend per share can be calculated using the constant earnings and the number of shares outstanding: 
Dividend per share = Earnings / Number of shares = 20 million / 2 million = $10 per share

The price per share can be calculated using the constant dividend and the cost of capital: 
Price per share = Dividend per share / Cost of capital = $10 / 0.10 = $100

Therefore, the current price per share for the stock is $100, which is option C.

Universal Air Is a No Growth Firm and Has Two