If Target Corp. (TGT) recently earned a profit of $6.07 earnings per share and has a P/E ratio of 16.5. The dividend has been growing at a 10 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 18 in five years?

Question 1:

What would be the stock price in five years if the P/E ratio remained unchanged?

Answer: $161.30

Question 2:

What would the price be if the P/E ratio increased to 18 in five years?

Answer: $175.96

Explanation:

Question 1:

What would be the stock price in five years if the P/E ratio remained unchanged?

Solution:

PV = $6.07

I = 10%

PMT = 0

N = 5

CPT FV = PV * (1+1/Y) ^N

CPT FV = $6.07 * (1+0.10) ^5

CPT FV = $9.78

Stock price in five years = $9.78*16.5 = $161.30 (answer)

Question 2:

What would the price be if the P/E ratio increased to 18 in five years?

CPT FV = $9.78

Price = CPT FV * 18

Price = $9.78 * 18

Price = $175.96 (answer)