Ferrell Inc. recently reported net income of $7 million. It has 290,000 shares o

Question

Ferrell Inc. recently reported net income of $7 million. It has 290,000 shares of common stock, which currently trades at $47 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $12.25 million. Over the next year, it also anticipates issuing an additional 87,000 shares of stock so that 1 year from now it will have 377,000 shares of common stock. Assuming Ferrell's price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Do not round intermediate calculations. Round your answer to the nearest cent.

Explanation / Answer

First we will calcualate P/E. Earnings per share(EPS)=Net income/Toatl shares

so Net income = 7 million . Total shares= 290000 Price= 47

EPS= 7,000,000/290,000

= 24.137

So P/E= Market price per share/EPS

= 47/24.137

= 1.9472

Now after 1 year Total shares= 377000 Net income= 12,250,000

EPS = 12,250,000/377000

= 32.493

P/E remains same so 1.9472

Price/32.493=1.9472

So Price = 1.9472*32.493

=63.271

stock price 1 year from now is 63.271

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