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Ferrell Inc. recently reported net income of $6 million. It has 400,000 shares of common stock,...

Ferrell Inc. recently reported net income of $6 million. It has 400,000 shares of common stock, which currently trades at $25 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $9.9 million. Over the next year, it also anticipates issuing an additional 120,000 shares of stock so that 1 year from now it will have 520,000 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.

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Answer #1

- Current net income= $6 million

- Current Earnings per share(EPS) =Current Net Income/Current No of shares outstanding

Current Earnings per share(EPS) = $6 million/400,000 shares

Current Earnings per share(EPS) = $15 per share

- Current P/E ratio = Current share price/Current EPS
Current P/E ratio = $25/$15

Current P/E ratio = 1.6667 times

- Now, Expected net income in next year = $9.9 million

No of shares outstanding in next year = 520,000

Expected Earnings per share(EPS) =Net Income/No of shares outstanding

EPS = $9.9 million/520,000

EPS = $19.0385

P/E ratio is expected to reamin same in next year.

Exepcted Share price in next year = P/E ratio*EPS

Exepcted Share price in next year = 1.6667*$19.0385

Exepcted Share price in next year = $31.73

So,  stock price 1 year from nowis $31.73

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