To determine: The high and low target stock prices over the next year.
Introduction:
Target stock price is a price in which the investor wants to exit from the current position to attain maximum earnings.
Answer to Problem 28QP
The high target stock prices over the next year are $76.95.
The low target stock prices over the next year are $60.79.
Explanation of Solution
Given information:
The high price of Year 1, Year 2, Year 3, and Year 4 is $48.60, $57.34, $69.46, and $74.85 respectively. The low price of Year 1, Year 2, Year 3, and Year 4 is $37.25, $42.18, $55.85, and $63.18 respectively. The earnings per share of Year 1, Year 2, Year 3, and Year 4 are $2.35, $2.48, $2.63, and $2.95. The projected earnings growth rate for next year is 9%.
Formulae:
The formula to calculate next year’s earnings per share:
Where,
EPS1refers to the earnings per share of next year,
EPSorefers to the current year’s earnings per share,
g refers to the expected growth rate.
The formula to calculate high or low price to earnings ratio:
The formula to determine average high or low price to earnings:
The formula to calculate the price of a share of stock:
Where,
EPS1 refers to the earnings per share of next year,
P1 refers to the price of stock per share.
Note:
The current stock price is often called as high or low target stock prices over the next year.
Compute the next year’s earnings per share:
Hence, the next year’s earnings per share are $3.22.
Compute the high price to earnings ratio of Year 1:
Hence, the high price to earnings ratio of Year 1 is $20.68.
Compute the high price to earnings ratio of Year 2:
Hence, the high price to earnings ratio of Year 2 is $23.12.
Compute the high price to earnings ratio of Year 3:
Hence, the high price to earnings ratio of Year 3 is $26.41.
Compute the high price to earnings ratio of Year 4:
Hence, the high price to earnings ratio of Year 4 is $25.37.
Compute the average high price to earnings:
Hence, the average high price to earnings ratio is $23.90.
Compute the high price of a share of stock:
Hence, high price of a share of stock is $76.95.
Compute the low price to earnings ratio of Year 1:
Hence, the low price to earnings ratio of Year 1 is $15.85.
Compute the low price to earnings ratio of Year 2:
Hence, the low price to earnings ratio of Year 2 is $17.01.
Compute the low price to earnings ratio of Year 3:
Hence, the low price to earnings ratio of Year 3 is $21.24.
Compute the low price to earnings ratio of Year 4:
Hence, the low price to earnings ratio of Year 4 is $21.42.
Compute the average low price to earnings:
Hence, the average low price to earnings ratio is $18.88.
Compute the low target price (price of a share of stock):
Hence, the low price of a share of stock is $60.79.
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Chapter 7 Solutions
ESSEN.OF CORP.FINANCE (LOOSE)-W/ACCESS
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