Question

Bill's Bakery expects earnings per share of $2.26 next year. Current book value is $4 per share. The appropriate discount rate for Bill's Bakery is 14 percent. Calculate the share price for Bill's Bakery if earnings grow at 3.2 percent forever. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Answer 1

Using the Gordon Growth Model, the price per share for Bill's Bakery is calculated to be $20.93, after using the given earnings per share, discount rate, and perpetual growth rate.

Step-by-step explanation:

To calculate the share price for Bill's Bakery based on the given information, we will use the Gordon Growth Model (also known as the Dividend Discount Model). According to this model, the price of a stock is the present value of all future dividends, which are assumed to grow at a constant rate. This formula is represented as P = D1 / (k - g), where P is the price per share, D1 is the dividend per share one year from now, k is the discount rate, and g is the growth rate of dividends. In this case, D1 can be assumed to be equal to the earnings per share as the entire earnings can be potentially paid out as dividends in a theoretical scenario.

Plugging in the values: P = $2.26 / (0.14 - 0.032) = $2.26 / 0.108. Therefore, the price per share is P = $20.93, after rounding to two decimal places.

Answer 2

To calculate the share price for Bill's Bakery, use the Gordon Growth Model formula. The share price for Bill's Bakery is calculated using the Gordon Growth Model, resulting in a share price of $20.93 when rounding to two decimal places.

Step-by-step explanation:

To calculate the share price for Bill's Bakery, we need to use the Gordon Growth Model formula. The formula is:

Share Price = Earnings per Share / (Discount Rate - Growth Rate)

Given that the earnings per share is $2.26, the discount rate is 14%, and the growth rate is 3.2%, we can substitute these values into the formula and calculate the share price:

Share Price = $2.26 / (0.14 - 0.032)

Share Price = $2.26 / 0.108

Share Price ≈ $20.93

Therefore, the share price for Bill's Bakery is approximately $20.93.