If you look at stock prices over any year, you will find a high and low stock pr
ID: 2777732 • 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 low stock price for the next year. Suppose we have the following information on a particular company: Year 1 Year 2 Year 3 Year 4 High price $90.25 $105.71 $127.73 $139.12 Low price 71.37 86.63 75.75 114.50 EPS 6.62 9.04 8.70 10.29 Earnings are expected to grow at 8 percent for the next year.
1. What is the high target stock price in one year?
2.What is the low target stock price in one year?
Required:1. What is the high target stock price in one year?
2.What is the low target stock price in one year?
Explanation / Answer
High P/E = High price/EPS
= 139.12/10.29
= 13.52
Low P/E = Low price/EPS
=114.50/10.29
= 11.13
EPS next year = 10.29 x (1+0.08) = 11.1132
High target price next year = High P/E x EPS next year
= 13.52 x 11.1132
=150.25
Low target price next year = Low P/E x EPS next year
= 11.13 x 11.1132
=123.69
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