If you look at stock prices over any year, you will find a high and low stock pr

Question

If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company:

What is your high target stock price over the next year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is your low target stock price over the next year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company:

Explanation / Answer

Answer: First, we need to find the earnings per share next year, which will be:

EPS 1 = EPS (1 + g )

EPS 1 = $12.40(1 + 0.07)

EPS 1 = $13.268

To find the high target stock price, we need to find the average high PE ratio each year, which is:

PE 1 = $98.90 / $8.18 = 12.090

PE 2 = $122.50 / $9.93 = 12.336

PE 3 = $131.90 / $11.01 = 11.98

PE 4 = $148.53 / $12.40 = 11.98

So, the average high PE is:

Average PE = (12.090 + 12.336 + 11.98 + 11.98) / 4

Average PE = 12.0965

Using the equation to calculate the price of a share of stock with the PE ratio,

the high target price is:

P 1 = Benchmark PE ratio × EPS 1

P 1 = 12.0965 ($13.268) P 1 = $160.496

Answer: To find the low target stock price, we need to find the average high PE ratio each year, which is:

PE 1 = $73.73 / $8.18 = 9.01344

PE 2 = $89.84 / $9.93 = 9.04733

PE 3 = $70.52 / $11.01 = 6.405

PE 4 = $117.05 / $12.40 = 9.4395

So, the average low PE is:

Average PE = (9.01344 + 9.04733 + 6.405 + 9.4395) / 4

Average PE = 8.476

Using the equation to calculate the price of a share of stock with the PE ratio, the low target price is:

P 1 = Benchmark PE ratio × EPS 1

P 1 = 8.476($13.268)

P 1 = $112.463

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