Question

Perine, Inc., has balance sheet equity of $6.8 million. At the same time, the income statement shows net income of $815,000. The company paid dividends of $285,000 and has 245,000 shares of stock outstanding. If the benchmark PE ratio is 16, what is the target stock price in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Return on Equity = Net Income / Total Equity
Return on Equity = $815,000 / $6,800,000
Return on Equity = 0.11985 or 11.985%

Payout Ratio = Dividends / Net Income
Payout Ratio = $285,000 / $815,000
Payout Ratio = 0.34969

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.34969
Retention Ratio = 0.65031

Sustainable Growth Rate = [Return on Equity * Retention Ratio] / [1 - Return on Equity * Retention Ratio]
Sustainable Growth Rate = [0.11985 * 0.65031] / [1 - 0.11985 * 0.65031]
Sustainable Growth Rate = 0.07794 / 0.92206
Sustainable Growth Rate = 0.0845 or 8.45%

Current Earnings per share = Net Income / Number of Shares Outstanding
Current Earnings per share = $815,000 / 245,000
Current Earnings per share = $3.32653

Expected Earnings per share = Current Earnings per share * (1 + Sustainable Growth Rate)
Expected Earnings per share = $3.32653 * 1.0845
Expected Earnings per share = $3.60762

Expected Stock Price = Expected Earnings per share * PE Ratio
Expected Stock Price = $3.60762 * 16
Expected Stock Price = $57.72

So, expected stock price in 1 year is $57.72