If you look at stock prices over any year, you will find a high and low stock pr
ID: 2739684 • 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 over the past four years: Earnings are projected to grow at 5 percent over the next year. What is your high target stock price over the next year? (Do not round intermediate calculations and round your 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 answer to 2 decimal places, e.g., 32.16.)Explanation / Answer
Earnings per Share (EPS) over next year = 11.60 + 5% of 11.60 = $ 12.18
a) First, we calculate PE ratio for each of year (1 to 4) using high prices.
High PE Ratio for Year 1 = 98.10 / 7.38 = 13.29
High PE Ratio for Year 2 = 121.70 / 9.13 = 13.33
High PE Ratio for Year 3 = 131.10 /10.21 = 12.84
High PE Ratio for Year 4 = 147.73 /11.60 = 12.73
Average High PE Ratio for each of year 1 to 4 = [13.29 + 13.33 + 12.84 +12.73] / 4 = 13.0475
High Target Stock Price = EPS over next year * Average High PE Ratio = 12.18 * 13.0475 = $ 158.92 (approx)
b) We calculate PE ratio for each of year (1 to 4) using the low prices to compute low target stock price.
Low PE Ratio for Year 1 = 72.93 / 7.38 = 9.88
Low PE Ratio for Year 2 = 89.04 / 9.13 = 9.75
Low PE Ratio for Year 3 = 69.72 / 10.21 = 6.83
Low PE Ratio for Year 4 = 116.25 / 11.60 = 10.02
Average Low PE Ratio for each of year 1 to 4 = [9.88 + 9.75 + 6.83 +10.02] / 4 = 9.12
Low Target Stock Price = EPS over next year * Average Low PE Ratio = 12.18 * 9.12 = $ 111.08 (approx)
Conclusion:-
a) High Target Stock Price over next year $ 158.92 b) Low Target Stock Price over next year $ 111.08Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.