If you look at stock prices over any year you will find a high and low stock pri
ID: 2763854 • Letter: I
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 tow stock price for the next year. Suppose we have the following information on a particular company: Earnings are expected to grow at 5.5 percent tor the next year. What is the high target stock price in one year? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) What is the low target stock price in one year? (Do not round intermediate calculations Round your answer to 2 decimal places (e.g., 32.16).)Explanation / Answer
High target price = $138.99 +/- 1%
Low stock price = $107.290 +/- 1%
Explanation:
First, we need to find the earnings per share next year, which will be:
EPS1= EPS0 (1 +g)
EPS1= $10.21(1 + 0.05)
EPS1= $10.721
To find the high target stock price, we need to find the average high PE ratio each year, which is:
PE1= $87.93 / $6.54 = 13.44
PE2= $100.35 / $8.96 = 11.20
PE3= $121.89/ $8.62 = 14.14
PE4= $133.60 / $10.21 = 13.08
So, the average high PE is:
Average PE = (13.44+ 11.20 + 14.14 + 13.08) / 4
Average PE = 12.96
Using the equation to calculate the price of a share of stock with the PE ratio, the high target price is:
P1= Benchmark PE ratio × EPS1P1= 11.78($10.721)
P1= $138.99
To find the low target stock price, we need to find the average high PE ratio each year, which is: PE1= $69.85 / $6.54 = 10.68
PE2= $83.19/ $8.96 = 9.28
PE3= $79.99 / $8.62 = 9.28
PE4= $110.18 / $10.21 = 10.79
So, the average low PE is:
Average PE = (10.68 + 9.28 + 9.28 + 10.79) / 4
Average PE = 10.00
Using the equation to calculate the price of a share of stock with the PE ratio, the low target price is:
P1= Benchmark PE ratio × EPS1
P1= 10($10.721)
P1= $107.290
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