Answer:
The target stock price in one year is $149.93
Explanation:
Fly Away, Inc., has
Balance sheet equity of (E) = $ 5,400,000
Also, the income statement shows net income of (NI) = $783,000.
The company paid dividends of (D) = $438,480
Shares of stock outstanding (N) = 100,000
Benchmark PE ratio = 18
Question = what is the target stock price in one year?
We need the expected EPS at the end of next year and not this year.
EPS this year, E₀ = NI / N
= 783,000 / 100,000
= $ 7.83
Retention Ratio, "R" = 1 - Dividend payout ratio = 1 - D/NI
= 1 - 438,480 / 783,000
= 1 - 56.00%
= 44.00%
Return on equity, ROE = NI / E
= 783,000 / 5,400,000
= 14.50%
Growth rate in earnings, g = R x ROE
= 44.00% x 14.50%
= 6.38%
Hence, expected EPS next year, E₁ = E₀ x (1 + g)
= $ 7.83 x (1 + 6.38%)
= $ 8.33
Hence, target price next year, P = Benchmark PE ratio x E₁
= 18 x $8.33
= $149.93
The target stock price in one year = $149.93
