Question

P/E Ratio Model and Future Price New York Times Co. (NYT) recently earned a profit of $1.21 earnings per share and has a P/E ratio of 19.59. The dividend has been growing at a 7.25 percent rate over the past six years. If this growth rate continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 22 in five years?

Answer 1

Answer:

* The stock price in five years if the P/E ratio remained unchanged: $33.64

* The price be if the P/E ratio increased to 22 in five years: $37.77.

Explanation:

As the dividend has been growing at 7.25% each year in the next five years, earnings per share in the next five years should grow at the same rate, and earnings per share in year five will be: 1.21 x (1+7.25%)^5 = $1.717.

* The stock price in five years if the P/E ratio remained unchanged will be equal to:

Earning per share in the next five years x Current P/E ratio = 1.717 x 19.59 = $33.64

* The price be if the P/E ratio increased to 22 in five years will be equal to:

Earning per share in the next five years x New P/E ratio = 1.717 x 22 = $37.77.