P/E AND STOCK PRICE Ferrell Inc. recently reported net income of $7 million. It
ID: 2815870 • Letter: P
Question
P/E AND STOCK PRICE Ferrell Inc. recently reported net income of $7 million. It has 390,000 shares of common stock, which currently trades at $33 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $11.2 million. Over the next year, it also anticipates issuing an additional 136,500 shares of stock so that 1 year from now it will have 526,500 shares of common stock. Assuming Ferrell's price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Do not round intermediate calculations. Round your answer to the nearest cent. .yiExplanation / Answer
Solution:
Current market price per share = $33
Net income =$70,00,000
No of shares =390000
Earning per share (EPS) = Net income / No of shares
EPS = 70,00,000/390000= $17.95 (approx)
P/ E ratio= MPS/EPS
P/E ratio= $33/$17.95= 1.84 (approx)
Next year,
Net income = $1,12,00,000
No. Of shares = 526500 shares
Earning per share ( EPS) = 1,12,00,000/526500=$21.27
P/E ratio remain constant as of last year =1.84
P/E ratio = MPS/EPS
1.84=MPS/21.27
Market price per share = 21.27*1.84=$39.14
Stock price 1 year from now = $39.14
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