Fontaine Inc. recently reported net income of $2 million. It has 330,000 shares

Question

Fontaine Inc. recently reported net income of $2 million. It has 330,000 shares of common stock, which currently trades at $31 a share. Fontaine continues to expand and anticipates that one year from now its net income will be $3.5 million. Over the next year it also anticipates issuing an additional 66,000 shares of stock, so that one year from now it will have 396,000 shares of common stock. Assuming its price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Round your answer to two decimal places

Explanation / Answer

Its current EPS is 2,000,000/330,000= 6.06. Thus its PE ratio is 31/6.06= 5.1155. In a year its EPS will be 3,500,000/396,000= 8.838 EPS. So at a PE ratio of 5.1155 its share price will be 8.838* 5,1155= $45.21

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