Ferrell Inc. recently reported net income of $8 million. It has 240,000 shares o
ID: 2814968 • Letter: F
Question
Ferrell Inc. recently reported net income of $8 million. It has 240,000 shares of common stock, which currently trades at $53 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $12 million. Over the next year, it also anticipates issuing an additional 84,000 shares of stock so that 1 year from now it will have 324,000 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
Step 1: Calculation of current EPS
EPS = Net income / shares outstanding
= 8,000,000/240,000
= 33.33
Step 2: Calculation of current PE Ratio
PE Ratio = Market Value per share / EPS
= 53/33.33
= 1.59
Step 3: Calculation of EPS 1 year from now
EPS = Net income 1 year from now / shares outstanding 1 year from now
= 12,000,000 / 324,000
= 37.04
Step 4: Calculation of stock price 1 year from now
stock price = PE Ratio * EPS
= 1.59*37.04
= 58.89
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