Question

Aaron Inc. has 321 million shares outstanding. It expects earnings at the end of the year to be

$641 million. The firmʹs equity cost of capital is 11%. Aaron pays out 50% of its earnings in total:
30% paid out as dividends and 20% used to repurchase shares. If Aaronʹs earnings are expected
to grow at a constant 7% per year, what is Aaronʹs share price?

Answer 1

To calculate the share price of Aaron Inc., we can use the Dividend Discount Model. By calculating the present value of the future dividends, we find that the share price is $4,123.33 million.

Step-by-step explanation:

To calculate the share price of Aaron Inc., we need to use the Dividend Discount Model. According to the model, the share price is equal to the present value of all future dividends. We can calculate this by using the formula:

Share Price = Dividends / (Cost of Capital - Dividend Growth Rate)

Given that Aaron Inc. pays out 30% of its earnings as dividends and the earnings are expected to grow at a constant rate of 7% per year, we can calculate the dividends as follows:

1. Dividend Year 1 = Earnings * Dividend Payout Ratio = $641 million * 30% = $192.3 million
2. Dividend Year 2 = Dividend Year 1 * (1 + Dividend Growth Rate) = $192.3 million * (1 + 7%) = $206 million
3. Dividend Year 3 = Dividend Year 2 * (1 + Dividend Growth Rate) = $206 million * (1 + 7%) = $220.42 million

Using these values, the share price can be calculated as:

Share Price = ($192.3 million / (11% - 7%)) + ($206 million / (11% - 7%)) + ($220.42 million / (11% - 7%)) = $4,123.33 million