Final answer:
To forecast BIB Inc.'s share price, multiply the projected EPS ($4) by the historical P/E ratio (20) to get an estimated share price of $80. In the Babble, Inc. case, the calculated share price is about $256,500 per share, based on the PV of expected profits over a two-year period. Stock prices are highly influenced by earnings expectations and historical trading multiples.
Step-by-step explanation:
To forecast the share price of BIB Inc., we should use the given P/E ratio and the projected earnings per share (EPS). Since BIB Inc. has historically traded at a P/E of 20 and the expected earnings are $4 per share, we can estimate the share price by multiplying the two values. Therefore, the forecast for the share price would be 20 times $4, which equals $80 per share.
In the hypothetical scenario of Babble, Inc., to determine what an investor would pay for a share of stock, we need to calculate the present value of future profits given an interest rate, then divide it by the number of shares. Assuming a 15% interest rate, if the present value (PV) of total profits is $51.3 million, then divided by 200 shares, we would get a price per share of about $256,500. However, it's essential to understand that in reality, expected profits and interest rates can vary.
Overall, determining the company stock price involves analyzing earnings projections, historical P/E ratios, and potential dividends. The anchored expectation of a company’s performance, as seen in analyst forecasts, can significantly impact stock prices.