Problem 8-29 Stock Valuation and PE [LO2]RAK, Inc., currently has an EPS of $1.70 and an earnings growth rate of 7.5 percent. If the benchmark PE ratio is 22, what is the target share price five years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

The target share price is $53.69

Explanation:

In calculating the target share price in five years from now, it would be appropriate to determine the value of EPS in five years timing horizon using the future value formula which is given as:

fv=pv * (1+r) ^N

PV is the present eps of $1.7

r is the eps growth rate of 7.5%

N is five years

fv=$1.70 * (1+7.5%) ^5

fv=2.440569854

Hence the target share price is computed using the P/E ratio:

P/E ratio=Price/EPS

Price is unknown]

EPS is 2.440569854

P/E ratio is 22

22=price/2.440569854

price=22*2.440569854

price is $53.69