Ferrell Inc. recently reported net income of $5 million. It has 650,000 shares o
ID: 2817787 • Letter: F
Question
Ferrell Inc. recently reported net income of $5 million. It has 650,000 shares of common stock, which currently trades at $59 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $7 million. Over the next year, it also anticipates issuing an additional 130,000 shares of stock so that 1 year from now it will have 780,000 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
Current Year:
Net Income = $5,000,000
Number of shares outstanding = 650,000
Current Price per share = $59
Earnings per share = Net Income / Number of shares outstanding
Earnings per share = $5,000,000 / 650,000
Earnings per share = $7.6923
Price-earnings Ratio = Current Price per share / Earnings per share
Price-earnings Ratio = $59 / $7.6923
Price-earnings Ratio = 7.67
Next Year:
Net Income = $7,000,000
Number of shares outstanding = 780,000
Price-earnings Ratio = 7.67
Earnings per share = Net Income / Number of shares outstanding
Earnings per share = $7,000,000 / 780,000
Earnings per share = $8.9744
Price-earnings Ratio = Current Price per share / Earnings per share
7.67 = Current Price per share / $8.9744
Current Price per share = $68.83
So, stock price 1 year from now is $68.83
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