Questions: Aaron inc. has 327 million shares outstanding. It expects earnings at the end of the year to be 5623 million. The firm's equity cost of capital is 10%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 6% per year, what is Aaron's share price? A. 11.91 B. 2381 C. 35.72 D. 47.62

Aaron inc. has 327 million shares outstanding. It expects earnings at the end of the year to be 5623 million. The firm's equity cost of capital is 10%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 6% per year, what is Aaron's share price? A. 11.91 B. 2381 C. 35.72 D. 47.62
Transcript text: Aaron inc. has 327 million shares outstanding. It expects earnings at the end of the year to be 5623 million. The firm's equity cost of capital is 10%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 6% per year, what is Aaron's share price? A. $11.91 B. $2381 C. $35.72 D. $47.62
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Solution

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Solution Steps

Step 1: Calculate the total amount of payout

Total payout = Earnings * Payout ratio = $5,623 million * 50% = $2,811.5 million

Step 2: Calculate the growth rate of dividends and share repurchases

Since the payout ratio is constant, the growth rate of dividends and share repurchases is the same as the growth rate of earnings, which is 6%.

Step 3: Calculate the value of the firm using the total payout model

Firm Value = Total Payout / (Cost of capital - Growth rate) Firm Value = $2,811.5 million / (0.10 - 0.06) Firm Value = $2,811.5 million / 0.04 Firm Value = $70,287.5 million

Step 4: Calculate the share price

Share Price = Firm Value / Number of shares outstanding Share Price = $70,287.5 million / 327 million Share Price = $214.95

Final Answer

The closest answer is $238.1, however, the exact calculated value is $214.95. There may be a typo in the provided answer choices. None of the provided options are correct.

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