Given the information below for HooYah! Corporation, compute the expected share

Question

Given the information below for HooYah! Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the same for 2017. (Do not round intermediate calculations. Round your answers to 2 decimal places. Exclude negative annual P/E and P/CFPS ratios from the average P/E and average P/CFPS ratio calculations. When computing annual growth rates, use a positive sign on the annual rate of change if the per share value increased in value and use a negative sign on the annual rate of change if the per share value deceased in value.)

Given the information below for HooYah! Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the same for 2017. (Do not round intermediate calculations Round your answers to 2 decimal places. Exclude negative annual P/E and P/CFPS ratios from the average P/E and average P/CFPS ratio calculations. When computing annual growth rates, use a positive sign on the annual rate of change if the per share value increased in value and use a negative sign on the annual rate of change if the per share value deceased in value.) 2011 2012 2013 2014 2015 2016 Year Price 8.00 44.50 116.00 193.00 $83. 13.5e EPS -3.30 -6.50 13.50 0.55 -0.25 20.30 0.04 0.06 4.00 CFPS -2.80 0.03 0.08 9.00 5.00 SPS 18.10 23.80 21.95 Share price Using P/E ratio Using P/CF ratio Using P/S ratio

Explanation / Answer

1

Share Price using P/E ratio

P / E ratio = Share Price/EPS = 13.5/0.06 = 225

Average EPS = (0.04 + 0.06 ) / 2 = 0.05

Share Price in 2017 = P/E ratio * Average EPS = 225 * 0.05 = $ 11.25

The price-earnings ratio shows what the company records in earnings relative to stock price

2

Share Price using P/CF ratio

P/CF ratio = Share Price/CF per share = 13.5/0.08 = 168.75

Average CFPS = (0.03 + 0.08) / 2 = 0.055

Share Price in 2017 = P/CF ratio * Average CFPS = 168.75 * 0.055 = $ 9.28

The price-to-cash-flow ratio measures how much cash a company generates relative to its stock price.

The price-to-cash-flow ratio is said to be a better investment valuation indicator than the price-earnings ratio, due to the fact that cash flows cannot be manipulated easily, as opposed to earnings, which are affected by depreciation and other non-cash items.

Although there is no single figure that points to an optimal price-to-cash-flow ratio, a ratio in the low single digits may indicate the stock is undervalued, while a higher ratio may suggest potential overvaluation.

3

Share Price using P/S ratio

P/S ratio = Share Price/Sales per share = 13.5/21.95 = 0.615

Average SPS = (5 + 13.5 + 18.1 + 20.3 + 23.8 + 21.95) / 6 = 17.11

Share Price in 2017 = P/S ratio * Average SPS = 0.615 * 17.11 = $ 10.52

The price-to-sales ratio is a valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues.

A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation.

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