Stock Valuation_examples (1) - 1.You have found the...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1.You have found the following historical information for the Daniela Company: Year 1 Year 2 Year 3 Year 4 Stock price $ 49.50 $ 58.12 $ 67.34 $ 60.25 EPS 2.40 2.58 2.71 2.85 Earnings are expected to grow at 11 percent for the next year. Using the company’s historical average PE as a benchmark, what is the target stock price in one year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Target stock price $ Explanation: We need to find the PE ratio each year, which is: PE 1 = $49.50 / $2.40 = 20.63 PE 2 = $58.12 / $2.58 = 22.53 PE 3 = $67.34 / $2.71 = 24.85 PE 4 = $60.25 / $2.85 = 21.14 So, the average PE is: Average PE = (20.63 + 22.53 + 24.85 + 21.14) / 4 Average PE = 22.29 First, we need to find the earnings per share next year, which will be: EPS 1 = EPS 0 (1 + g ) EPS 1 = $2.85(1 + 0.11) EPS 1 = $3.16 Using the equation to calculate the price of a share of stock with the PE ratio: P 1 = Benchmark PE ratio × EPS 1 P 1 = 22.29($3.16) P 1 = $70.50
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2. In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern