Question

Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with...

Extruded Elements had Net Income of $25,000,000 last year, and $26,250,000 this year (in line with its long-term earnings growth rate). There are 4,000,000 shares outstanding, and the firm follows a policy of paying 30% of its earnings out as dividends The required rate of return on Extruded's shares is 13%. What is the share price today based on the Gordon growth model?

$16.00

$23.44

$24.63

$25.88

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Answer #1

Growth rate = (Earning this year - Previous year earnings) / Previous year earnings

= (26250000 - 25000000)/25000000

= 0.05 or 5%

Number of shares = 4000000

Dividend amount (This year) = Payout ratio * Earnings this year

= 30% * 26250000

= 7875000

Dividend per share = Dividend amount / Number of shares

= 7875000 / 4000000

=1.96875

Gordon growth model = Dividend for next period / (Required return - growth rate)

= 1.96875 * (1+5%) / (13%-5%)

= 2.0671875 / 0.08

= 25.88

So, The Share price is $25.88

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