Question

perline, inc., has balance sheet equity of $6.2 million.At the same time, the income statement shows net income of $948600. The company paid dividends of $493272 and has 100000 shares of stock outstanding. If the benchmark PE ratio is 26, what is the target stock price in one year?

Answer 1

Answer:

The target stock price in one year is $264.75

Explanation:

We first calculate the ROE as below

ROE= Earnings / Book value of Equity

ROE= $948,600 / $6,200,000

ROE= 0.153

The payout ratio is:

b=  Dividend / Net income

b = $493,272 / $948,600

b = 0.52

So the sustainable growth rate is:

g = ROE * (1-b)

g = 0.153 * (1-0.52)

g = 0.153 * 0.48

g = 0.07344

The earning in the first year are

EPS1 = $948,600 / 100,000  * (1 + 0.07344)

EPS1 = $9.486 * 1.07344

EPS1 = $10.1827

According to the benchmark PE ratio, the target stock price in one year is

Price = EPS1 * 26

Price = $10.1827 * 26

Price = $264.75