Question

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.)

Answer 1

Answer:

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