Question

Rite Bite Enterprises sells toothpicks. Gross revenues last year were $8.3 million, and total costs were $4.2 million. Rite Bite has 1.5 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 4 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends.

If the discount rate is 15%, and all cash flows are received at year's end, what is the price per share of Rite Bite stock? Do not round intermediate calculations and round your answers to 2 decimal places. e.g., 32.16.

Answer 1

Price per share - $25.84 per unit

Step-by-step explanation:

According to the dividend valuation model the value of a share is the present value of he expected future dividend discounted at the required rate of return.

Value of company = (Earnings × (1+r))/r-g) × 100

Earnings (Dividends) = Gross revenue - total costs

Dividend = $8.3 - $4.2 = $4.1

Value of a firm - Dividend (1+g)/(r-g)

r- discount rate - 15%, g- 4%

Value of a company = 4.1 ×(1.04)/0.15-0.04

= $38.76 million

Price per share = Value of firm / number of shares

=$38.76 million/1.5 million units

= $25.84 per unit