Question

You have found the following historical information for the Daniela Company over the past four years:...

You have found the following historical information for the Daniela Company over the past four years: Year 1 Year 2 Year 3 Year 4 Stock price $ 50.55 $ 59.52 $ 68.74 $ 62.00 EPS 2.54 2.66 2.92 3.06 Earnings are expected to grow at 16 percent for the next year. Using the company’s historical average PE as a benchmark, what is the target stock price one year from today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Target stock price $

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Answer #1

PE ratio for following years = Market price of stock / Earnings per share

Year 1 : 50.55 / 2.54 = 19.90

Year 2 : 59.52 / 2.66 = 22.26

Year 3 : 68.74 / 2.92 = 23.54

Year 4 : 62.00 / 3.06 = 20.26

Average PE = (19.90 + 22.26 + 23.54 +20.26) / 4

Average PE = 21.49

Expected earnings for next year = earnings for year 4 + (earnings for year 4 * 16%) = 3.06 + (3.06*16%)

Expected earnings for next year = 3.55

Now,

Target stock price= Expected earnings for next year * Average PE

Target stock price = 3.55 * 21.49 = $76.29

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