Question

Taggart Goods Corp. just reported a net income of $8,000,000, and its current stock price is $17.50 per share. Taggart is forecasting an increase of 25% for its net income next year, but it also expects it will have to issue 2,400,000 new shares of stock (raising its shares outstanding from 5,500,000 shares to 7,900,000 shares). If Taggart’s forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does management expect its stock price to be one year from now? (Hint: If you choose to compute the firm’s price/earnings ratio, round its value to four decimal places.)

Answer 1

Answer:

$15.2279

Explanation:

Current P/E = Price per share * Share outstanding / Net Income

Current P/E = 17.5 * 5,500,000 / 8,000,000

Current P/E = 12.03

The Current P/E will remain the same next year

Next year P/E = Price * (New shares + Existing shares) / Next year earnings

12.03 = Price * (5,500,000 + 2,400,000) / 8,000,000 * 1.25

12.03 = Price * (7,900,000) / 10,000,000

12.03 * 10,000,000 = Price * (7,900,000)

Price = 120,300,000 / 7,900,000

Price = 15.22785

Hence, the price of shares next year will be $15.2279