Question

Clark Co. currently has a PE ratio of 12.32 and has EPS of $4.36. Clark has just created an innovative product that will help increase sales. It is expected that Clark's PE ratio will increase to 15 and its EPS will increase to $6.00. What is the percent increase in the stock price from now until next year? a. 65.00 % b. 67.55% c. 75.00% d. 82.50%

Answer 1

Answer :

Option "b - 67.55%"

Calculation of the percentage increase in stock price:

Given

Current PE ratio = 12.32 ; Current EPS = $4.36

After creating innovative product ,Sales increased and

Expected PE ratio = 15 ; Expected EPS = $6 .

Calculation of current stock price:

PE ratio = Price per share / Earning per share = Stock price /EPS

by using above formula,

Current PE ratio =Current stock price / current EPS

12.32 = Stock price/4.36

Stock price = 12.32*4.36

=$53.7152

So Current stock price is $53.7152

Calculation of expected stock price:

By using abovePE ratio formula,

Expected PE ratio = Expected stock price / Expected EPS

15 = Stock price/6

Stock price = 15*6

=$90

So Current stock price is $90.

The increase percentage in Stock price is

=(Expected Stock price - Current stock price)/Current stock price

=(90-53.7152)/53.7152

=36.28/53.7152

=67.55%

Therefore ,The increase percentage in Stock price is 67.55%