Answer:
For this case let X represent the earnings per share. And we know that:
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:
Then we can use the dividen growth model given by the following expression:
Where P0 represent the share price and R=12% =0.12 the discount rate and if we replace we got:
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:
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:
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:
Where P0 represent the share price and R=12% =0.12 the discount rate and if we replace we got:
So then the share price for Bill's Bakery on this case would be $ 36.33