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 2011 2012 2013 2014 2015 2016 Price $ 55.10 $ 61.00 $ 59.70 $ 57.20 $ 78.70 $ 94.10 EPS 2.60 3.31 4.11 4.81 7.35 8.35 CFPS 7.62 8.52 8.92 10.47 12.01 13.24 SPS 26.20 31.20 30.60 34.10 45.30 53.30

Answer 1

Please see the table below. The linkage will help you understand the mathematics. For the sale of explanation for the year 2011, P/E ratio has been calculated as = Price in 2011 / EPS in 2011 = 55.10 / 2.60 = 21.19 and so on. Growth rate in EPS for 2012 = EPS of 2012 / EPS of 2011 - 1 = 3.31/2.60 - 1 = 27.31% and so on. The last column is the average of the values in previous columns.

Year	Linkage	2011	2012	2013	2014	2015	2016	Average
Price	P	55.10	61.00	59.70	57.20	78.70	94.10
EPS	E	2.60	3.31	4.11	4.81	7.35	8.35
CFPS	C	7.62	8.52	8.92	10.47	12.01	13.24
SPS	S	26.20	31.20	30.60	34.10	45.30	53.30
P/E		21.19	18.43	14.53	11.89	10.71	11.27	14.67
P/C		7.23	7.16	6.69	5.46	6.55	7.11	6.70
P/S		2.10	1.96	1.95	1.68	1.74	1.77	1.86
Growth rates
EPS			27.31%	24.17%	17.03%	52.81%	13.61%	26.98%
CFPS			11.81%	4.69%	17.38%	14.71%	10.24%	11.77%
SPS			19.08%	-1.92%	11.44%	32.84%	17.66%	15.82%

EPS in 2017 = E₂₀₁₇ = E₂₀₁₆ x (1 + average growth rate in EPS) = 8.35 x (1 + 26.98%) = 10.60

CFPS in 2017 = C₂₀₁₇ = C₂₀₁₆ x (1 + average growth rate in CFPS) = 13.24 x (1 + 11.77%) = 14.80

SPS in 2017 = S₂₀₁₇ = S₂₀₁₆ x (1 + average growth rate in SPS) = 53.30 x (1 + 15.82%) = 61.73

Hence, the expected share price at the end of 2017 using

• P/E ratio analysis = Average P/E x E₂₀₁₇ = 14.67 x 10.60 = $ 155.54
• P/C ratio analysis = Average P/C x C₂₀₁₇ = 6.70 x 14.80 = $ 99.16
• P/S ratio = Average P/S x S₂₀₁₇ = 1.86 x 61.73 = $ 115.12