Bill’s Bakery has current earnings per share of $2.5. Current book value is $4.3

Question

Bill’s Bakery has current earnings per share of $2.5. Current book value is $4.3 per share. The appropriate discount rate for Bill’s Bakery is 17 percent. Calculate the share price for Bill’s Bakery if earnings grow at 3.4 percent forever. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

I know the answer is not 18.38. I am struggling with this problem

Bill’s Bakery has current earnings per share of $2.5. Current book value is $4.3 per share. The appropriate discount rate for Bill’s Bakery is 17 percent. Calculate the share price for Bill’s Bakery if earnings grow at 3.4 percent forever. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

ROE = current earnings per share/Current book value

ROE = 2.5/4.3

ROE = 58.13954%

Retention Ratio = Growth rate/ROE

Retention Ratio = 3.4%/58.13954%

Retention Ratio = 5.848%

Dividend Payout ratio = (1-Retention Ratio)

Dividend Payout ratio = (1-5.848%)

Dividend Payout ratio = 94.152%

Current dividend per share = current earnings per share*Dividend Payout ratio

Current dividend per share = 2.5*94.152%

Current dividend per share = 2.3538

Expected dividend per share = 2.3538*1.034

Share price = Expected dividend per share/(discount rate - growth rate)

Share price =  2.3538*1.034/(17%-3.4%)

Share price = $ 17.90

Answer

Share price = $ 17.90

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