Question

AviBank Plastics generated an EPS of ​$0.96 over the last 12 months. The​ company's earnings are expected to grow by 24.6 % next​ year, and because there will be no significant change in the number of shares​ outstanding, EPS should grow at about the same rate. You feel the stock should trade at a​ P/E of around 30 times earnings. Use the​ P/E approach to set a value on this stock.

Using the​ P/E approach, the value on this stock is $

Answer 1

There are two ways of looking at a solution to this problem. The first way would use the current EPS of $ 0.96 and multiply it with the expected PE of 30 to arrive at the stock's value. This method would be using what we call the 12-months trailing EPS to arrive at the stock price. The second and the more logical method of solving this problem is to determine the expected EPS next year using the estimated growth rate and then multiplying the PE Ratio with this expected EPS to arrive at the stock's price. As the value of any stock (market value) is driven majorly by investor estimates of the stock's future earning power, earnings growth rate, etc it is logical that one uses the expected future EPS to predict the stock's price.

Current EPS = $ 0.96 and Expected Growth Rate = 24.6 %

Therefore, Expected EPS = 0.96 x 1.246 = $ 1.19616

PE Ratio = 30

Therefore, Expected Stock Price = 1.19616 x 30 = $ 35.8848 ~ $ 35.88