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15 April, 11:46

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 $ 49.18 $ 53.18 $ 58.14 $ 56.32 EPS 2.35 2.47 2.78 3.04 Earnings are expected to grow at 11 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.)

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  1. 15 April, 14:46
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    The target stock price one year from today is $ 69.09

    Explanation:

    1. Let's review the information given to us to solve the problem correctly:

    Year 1 Year 2 Year 3 Year 4

    Stock price $ 49.18 $ 53.18 $ 58.14 $ 56.32

    EPS $ 2.35 $ 2.47 $ 2.78 $ 3.04

    Earnings are expected to grow at 11 percent for the next year.

    2. 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.)

    Let's calculate the PE, this way:

    PE = Market value per share

    /Earnings per share

    Year 1 Year 2 Year 3 Year 4

    PE 49.18/2.35 53.18/2.47 58.14/2.78 56.32/3.04

    PE 20.92766 21.53036 20.91366 18.52632

    PE Average = 20.92766 + 21.53036 + 20.91366 + 18.52632 / 4

    PE Average = 81.898 / 4 = 20.4745

    EPS for Year 5 = EPS Year 4 + 11%

    EPS for year 5 = 3.04 * 1.11 = 3.3744

    Now, we can find out the target stock price for Year 5, this way:

    Target stock price = PE Average * EPS for Year 5

    Target stock price = 20.4745 * 3.3744

    Target stock price = $ 69.09
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