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Computing Earnings Per Share and Stock Price

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XYZ, Inc.'s revenues have been $500,000 and total costs have been $250,000; both costs and revenues are expected to remain the same in perpetuity. XYZ, Inc. is an all equity firm (i.e., it has no debt) and has 125,000 shares outstanding. The market knows that the company has no other investment (or growth) opportunities. XYZ, Inc. currently pays out all its earnings as dividends (100% payout) and is expected to do so forever. The dividends on the basis of last year's earnings have just been paid out. If the appropriate discount rate for XYZ, Inc. is 7.50%, what is the price per share of XYZ, Inc.? For this question, assume taxes are zero. (Enter the number with up to two decimals but without any $ or comma sign.)

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Solution Summary

This solution illustrates how to compute earnings per share and stock price in an all-equity firm without taxes.

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Net income equals revenues minus costs. XYZ's net income (or earnings) equals $500,000 (in revenues) less $250,000 (in costs), or $250,000. Earnings per share equals earnings divided by ...

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