Question

Blue Hamster Manufacturing Inc. just reported earnings after tax (also called net income) of $8,000,000, and a current stock price of $39.50 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 1,500,000 new shares of stock (raising its shares outstanding from 5,500,000 to 7,000,000). If Blue Hamster’s forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company’s management expect its stock price to be one year from now? (Note: Round intermediate calculations to four decimal places. Round the expected stock price to two decimal places.) $38.80 per share $40 per share $29.10 per share $48.50 per share

Answer 1

Answer:

$38.80 per share

Explanation:

The computation of the stock price one year from now is shown below:

But before that first need to do the following calculations

Current Year Price earning ratio is

= ($39.50 × 5,500,000) ÷ $8,000,000

= $27.15

Now  

Next year earnings = $8,000,000 × (1 + 25%)

= $10,000,000

Finally,

Share price next year = ($10,000,000 × $27.15) ÷ 7,000,000

= $38.80 per share