Question

Given the information below for Seger Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the same for 2017. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year Price EPS CFPS SPS 2011 $58.10 4.54 7.87 28.70 2012 $ 64.00 5.25 8.72 33.70 2013 2014 2015 $ 62.70 $ 60.20 $ 81.70 6.05 6.75 7.60 9.07 10.72 12.16 33.10 36.60 47.80 2016 $ 97.10 8.60 13.34 55.80 Share price Using P/E ratio Using P/CF ratio Using P/S ratio

Answer 1

First, we compute the historical average growth rates between 2011 and 2016 (5 years)

Ending value = beginning value * (1 + growth rate)^{number of years}

EPS in 2016 = EPS in 2011 * (1 + growth rate)⁵

$8.60 = $4.54 * (1 + growth rate)⁵

growth rate = (8.60 / 4.54)^1/5 - 1

growth rate = 13.63%

CFPS in 2016 = CFPS in 2011 * (1 + growth rate)⁵

$13.34 = $7.87 * (1 + growth rate)⁵

growth rate = (13.34 / 7.87)^1/5 - 1

growth rate = 11.13%

SPS in 2016 = SPS in 2011 * (1 + growth rate)⁵

$55.80 = $28.70 * (1 + growth rate)⁵

growth rate = (55.80 / 28.70)^1/5 - 1

growth rate = 14.22%

Next, we compute the estimated values in 2017

EPS in 2017 = EPS in 2016 * (1 + historical average growth rate)

EPS in 2017 = $8.60 * (1 + 13.63%) = $9.77

CFPS in 2017 = CFPS in 2016 * (1 + historical average growth rate)

CFPS in 2017 = $13.34 * (1 + 11.13%) = $14.82

SPS in 2017 = SPS in 2016 * (1 + historical average growth rate)

SPS in 2017 = $55.80 * (1 + 14.22%) = $63.74

Next, we compute the historical average P/E ratio, P/CF ratio and P/S ratios as below :

1 2 3 4 5 6 7 8 A year price EPS CFPS SPS P/E ratio P/CF ratio P/S ratio B 2011 $ 58.10 $ 4.54 $ 7.87 $ 28.70 12.80 7.38 2.02 C 2012 $ 64.00 $ 5.25 $ 8.72 $ 33.70 11.07 6.66 1.72 D 2013 $ 62.70 $ 6.05 $ 9.07 $ 33.10 9.60 6.41 1.76 E 2014 $ 60.20 $ 6.75 $ 10.72 $ 36.60 8.61 5.42 1.59 F G H 2015 2016 Average $ 81.70 $ 97.10 $ 7.60 $ 8.60 $ 12.16 $ 13.34 $ 47.80 $ 55.80 7.64 6.76 9.41 4.78 4.36 5.83 1.22 1.04 1.56

A B C D E F G H 1 year 2011 2012 2013 2014 2015 2016 Average 2 price 58.1 64 6 2.7 60.2 81.7 97.1 3 EPS 4.54 5.25 6 .05 6.75 7.6 4 CFPS 7.87 8.72 9.07 10.72 12.16 13.34 5 SPS 28.7 33.7 33.1 36.6 47.8 55.8 6 P/E ratio =$B$2/B3 =$B$2/C3 =$B$2/D3 =$B$2/E3 =$B$2/F3 =$B$2/G3 =AVERAGE(B6:56) 7 P/CF ratio =$B$2/B4 =$B$2/04 =$B$2/D4 =$B$2/E4 =$B$2/F4 =$B$2/64 =AVERAGE(B7:67) 8 P/S ratio =$B$2/B5 =$B$2/C5 =$B$2/05 -$B$2/E5 =$B$2/F5 =$B$2/65 =AVERAGE(B8:58)

Expected share price using P/E ratio

Expected share price = average P/E ratio * EPS in 2017

Expected share price = 9.41 * $9.77 = $91.98

Expected share price using P/CF ratio

Expected share price = average P/CF ratio * CFPS in 2017

Expected share price = 5.83 * $14.82 = $86.49

Expected share price using P/S ratio

Expected share price = average P/S ratio * SPS in 2017

Expected share price = 1.56 * $63.74 = $99.30