Stock Valuation_examples (1)

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

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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

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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
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