Question

If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company over the past four years:

	Year 1				Year 2				Year 3				Year 4
High price	$	98.70			$	122.30			$	131.70			$	148.33
Low price		73.53				89.64				70.32				116.85
EPS		7.98				9.73				10.81				12.20

  

Earnings are projected to grow at 5 percent over the next year.

What is your high target stock price over the next year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

High target stock price

$

What is your low target stock price over the next year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Low target stock price

$

Answer 1

	The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
a)	The high target price is given as follows:
	Year	High Price	EPS	P/E
	1	$   98.70	$     7.98	$   12.37
	2	$ 122.30	$     9.73	$   12.57
	3	$ 131.70	$   10.81	$   12.18
	4	$ 148.33	$   12.20	$   12.16
		Average P/E		$   12.32
	Since the EPS is growing by 5% next year, EPS next year = 12.32 *1.05 = 12.94
	So target high price = 12.94 * 12.32 = $159.42
b)	Similary Low target price is given as follows:
	Year	Low Price	EPS	P/E
	1	$   73.53	$     7.98	$     9.21
	2	$   89.64	$     9.73	$     9.21
	3	$   70.32	$   10.81	$     6.51
	4	$ 116.85	$   12.20	$     9.58
		Average P/E		$     8.63
	Since the EPS is growing by 5% next year, EPS next year = 8.63 *1.05 = $9.06
	So target low price = 8.63 * 9.06 = $78.17
	This solution is provided with detailed explanation. Please discuss in case of Doubt.
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