Blue Dog Manufacturing Corp. just reported a net income of $11,000,000, and its

Question

Blue Dog Manufacturing Corp. just reported a net income of $11,000,000, and its current stock price is $23.00 per share. Blue Dog is forecasting an increase of 25% for its net income next year, but it also expects it will have to issue 2,100,000 new shares of stock (raising its shares outstanding from 5,500,000 shares to 7,600,000 shares).

If Blue Dog’s forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does management expect its stock price to be one year from now? (Hint: If you choose to compute the firm’s price/earnings ratio, round its value to four decimal places.)

Explanation / Answer

Statement showing computations Particulars Amount Net Income 11,000,000.00 Existing Shares      5,500,000.00 Existing EPS = 11m/5.5m                      2.00 Existing MPS                    23.00 Existig PE Ratio = 23/2                    11.50 New Income = 11m*1.25 13,750,000.00 New Shares      7,600,000.00 New EPS = 13.75m/7.6m                      1.81 PE Ratio                    11.50 Expected Stock price =1.81*11.50                    20.81

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