In: Finance
The correct answer is c. $113.90, $98.23 respectively
Price earnings (PE) = Price of stock / Earnings per share of the stock
Step 1 - Calculation of Earnings per share in year 5
= Current EPS * (1 + Growth rate)5
= $2.85 * (1+0.115)5
= $2.85 * (1.115)5
= $2.85 * 1.72335
= $4.91155
Step 2 - Calculation of Price at year 5
Price earnings (PE) = Price of stock / Earnings per share of the stock
23.19 = Price of stock / $4.91155
Price of stock = $4.91155 * 23.19
= $113.90 ( Rounded to two decimal places)
Price of stock if PE ratio declined to 20
Price earnings (PE) = Price of stock / Earnings per share of the stock
20 = Price of stock / $4.91155
Price of stock = $4.91155 * 20
= $98.23 (Rounded to two decimal places)
Note - How did we calculate (1.115)5
= 1.115 * 1.115 * 1.115 * 1.115 * 1.115
= 1.72335