If you look at stock prices over any year, you will find a high and low stock pr

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: Earnings are projected to grow at 9 percent over the next year. What is your high target stock price over the next year? (Do not round intermediate calculations and round your final 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 final answer to 2 decimal places, (e.g., 32.16))

Explanation / Answer

Answer Step-1 First we need to fin dthe earnings per share next year, which will be: EPS 1 = EPS0 (1 + g ) EPS 1 = 12.60 (1 + 0.09) EPS 1 = 12.60 (1.09) EPS 1 = 13.734 Step-2 To find the high target stock price, we need to find the average high PE ratio each year, which is: PE1= High Price/EPS Year 1 Year 2 Year 3 Year 4 High Price $ 99.10 $ 122.70 $    132.10 $ 148.73 Low Price $ 73.93 $     90.04 $      70.72 $ 117.25 EPS 8.38 10.13 11.21 12.6 PE 11.83 12.11 11.78 11.80 PE 1 PE 2 PE 3 PE 4 So, the average high PE is: Average PE=(11.83+12.11+11.78+11.80)/4 Average PE=$ 11.88 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 × EPS1 P1= 11.88 X 13.73 P1= $ 163.11 Answer Step-3 To find the low target stock price, we need to find the average high PE ratio each year, which is: PE1= Low Price/EPS Year 1 Year 2 Year 3 Year 4 High Price $ 99.10 $ 122.70 $    132.10 $ 148.73 Low Price $ 73.93 $     90.04 $      70.72 $ 117.25 EPS 8.38 10.13 11.21 12.6 PE 8.82 8.89 6.31 9.31 PE 1 PE 2 PE 3 PE 4 So, the average low PE is: Average PE=(8.82+8.89+6.31+9.31)/4 Average PE=$ 8.33 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= 8.33 X 13.73 P1= $ 114.37 Answer

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