Question

You have found the following historical information for the Daniela Company: Year 1 Year 2 Year 3 Year 4 Stock price EPS $63.25 $71.94 $83.43 $88.27 3.15 3.35 3.60 3.85 Earnings are expected to grow at 7 percent for the next year. Using the company's historical average PE as a benchmark, what is the target stock price in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Target price

Answer 1

Step-1, Calculation of Average Price-Earnings Ratio (P/E Ratio)

Price-Earnings Ratio (P/E Ratio) = Current Stock Price / Earnings per share

P/E Ratio Year 1 = 20.08 Times [$63.25 / $3.15]

P/E Ratio Year 2 = 21.47 Times [$71.94 / $3.35]

P/E Ratio Year 3 = 23.18 Times [$83.43 / $3.60]

P/E Ratio Year 4 = 22.93 Times [$88.27 / $3.85]

Average Price-Earnings Ratio (P/E Ratio) = Total of P/E Ratio / 4 Years

= [20.08 + 21.47 + 23.18 + 22.93] / 4 Years

= 87.66 / 4 Years

= 21.9141 Times

Step-2, Calculation of Earnings per share (EPS) for the next year

Earnings per share (EPS) for the next year = EPS for the last year x (1 + Growth Rate)

= EPS4 x (1 + g)

= $3.85 per share x (1 + 0.07)

= $3.85 per share x 1.07

= $4.1195 per share

Step-3, Target Stock Price one year from today

Target Stock Price one year from today = EPS foe the next year x Average P/E Ratio

= $4.1195 per share x 21.9141 Times

= $90.27 per share

“Hence, the Target Stock Price one year from today will be $90.27”