Better Experts, Ltd. (BEL) specializes in taking underperforming companies to a higher level of performance. BEL’s capital structure at December 31, 2013, included 20,000 shares of $ 2.25 preferred stock and 240,000 shares of common stock. During 2014, BEL issued common stock and ended the year with 258,000 shares of common stock outstanding. Average common shares outstanding during 2014 were 245,000. Income from continuing operations during 2014 was $ 449,000. The company discontinued a segment of the business at a loss of $ 57,000, and an extraordinary item generated a gain of $ 94,000. All amounts are after income tax. Assume the number of preferred shares outstanding did not change in 2014.
1. Compute BEL’s earnings per share. Start with income from continuing operations.
2. Analysts believe BEL can earn its current level of income for the indefinite future. Estimate the market price of a share of BEL common stock at investment capitalization rates of 6%, 8%, and 10%. Which estimate presumes an investment in BEL is the most risky? How can you tell?