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 expected to grow at 6 percent for the next year. Required: What are the high and low PE ratios for each year? What are the average high and low PE ratios over this period? What is the high target stock price in one year? What is the low target stock price in one year?

Explanation / Answer

Calculation of High and low Price Earning Ratio High Low Year1 85.90/6.47 13.27666151 68.52/6.47 10.59041731 Year2 95.66/8.89 10.76040495 80.18/8.89 9.01912261 Year 3 116.78/8.55 13.65847953 83.70/8.55 9.789473684 Year 4 128.77/10.14 12.69921105 106.40/10.14 10.49309665 50.39475704 39.89211025 Average PE Ratio High 50.39/4 39.89/4 High PE Ratio 12.5975 Low PE Ratio 9.9725

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