Bills Bakery has current earnings per share of 257 Current b

Bill’s Bakery has current earnings per share of $2.57. Current book value is $7.78 per share. The appropriate discount rate for Bill’s Bakery is 10 percent. Calculate the share price for Bill’s Bakery if earnings grow at 3.6 percent forever. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Solution

Share price would be computed as follows -

P0 = B + [ { E x (1 + g) - (B x r) } / (r - g) ]

where, P0 = price per share, B = Book value per share, E = Earnings per share, g = constant growth rate, r = discount rate

P0 = $7.78 + [ { $2.57 x (1 + 0.036) - ($7.78 x 0.10) } / (0.10 - 0.036) ] = $7.78 + $29.445625 = $37.225625 or $37.23