erine, Inc., has balance sheet equity of $5.8 million. At the same time, the income statement shows net income of $864,200. The company paid dividends of $466,668 and has 100,000 shares of stock outstanding. If the benchmark PE ratio is 22, what is the target stock price in one year? Assume the firm will grow at the sustainable growth rate

Question

Gloria Turner

Business

28 November, 22:52

erine, Inc., has balance sheet equity of $5.8 million. At the same time, the income statement shows net income of $864,200. The company paid dividends of $466,668 and has 100,000 shares of stock outstanding. If the benchmark PE ratio is 22, what is the target stock price in one year? Assume the firm will grow at the sustainable growth rate

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Ryker Hanna · Answer 1

the stock price will be of 203.06 dollars

Explanation:

Price earning ratio: 22

PE: price / earnings per share

payout ratio: 466,668/864,200 = 0.54

so: retention ratio: 0.46

return on equity: 864,200 / 5,800,000 = 0.149 = 14.90%

sustainable grow rate: return on equity x retention ratio

0.149 x 0.46 = 0,06854‬

The next-year income, will grow by 0.06854

864,200 x 1.06854 = 923,432.268

There is 100,000 shares outstanding so:

EPS: 9.23 dollars

Price/Earning ratio: 22 Therefore Price = 9.23 x 22 = 203.06 dollars