Answer:
For this case let X represent the earnings per share. And we know that:
[tex] X_0 = 3.06[/tex] represent the earnings per share at year 0
The increasing factor on this case is i = 3.3% = 0.033
So then we can find the earnings per share at year 1 like this:
[tex] X_1 = (1+i) x_o = (1+0.033)*3.06 = 3.16098[/tex]
Then we can use the dividen growth model given by the following expression:
[tex] P0 = \frac{X_1}{R-i}[/tex]
Where P0 represent the share price and R=12% =0.12 the discount rate and if we replace we got:
[tex] P0 = \frac{3.16098}{0.12-0.033}= 36.3331[/tex]
So then the share price for Bill's Bakery on this case would be $ 36.33
Explanation:
For this case let X represent the earnings per share. And we know that:
[tex] X_0 = 3.06[/tex] represent the earnings per share at year 0
The increasing factor on this case is i = 3.3% = 0.033
So then we can find the earnings per share at year 1 like this:
[tex] X_1 = (1+i) x_o = (1+0.033)*3.06 = 3.16098[/tex]
Dividend growth model is defined as a valuation model, used to "calculate the fair value of stock, assuming that the dividends grow either at a stable rate in perpetuity or at a different rate during the period at hand".
Then we can use the dividend growth model given by the following expression:
[tex] P0 = \frac{X_1}{R-i}[/tex]
Where P0 represent the share price and R=12% =0.12 the discount rate and if we replace we got:
[tex] P0 = \frac{3.16098}{0.12-0.033}= 36.3331[/tex]
So then the share price for Bill's Bakery on this case would be $ 36.33