Question

Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $3.25 million. Over the next year, it also anticipates issuing an additional 150,000 shares of stock so that 1 year from now it will have 650,000 shares of common stock. Assuming Fontaine’s price/earnings ratio remains at its current level, what will be its stock price 1 year from now?

Answer 1

$50

Step-by-step explanation:

Given,

Current Net income = $2,000,000

No. of common shares today = 500,000

Current market price per share = $40

Anticipated Net income in 1 year = $ 3,250,000

Anticipated No. of common shares in 1 year = 500,000 +150000 =650,000

From this data, then

The current Earnings Per Share(EPS) =
`(2,000,000)/(500,000) = 4`

Current Price/Earning ratio =
`( Price per share)/(EPS) = (40)/(4) = 10`

Anticipated EPS in 1 year=
`(Anticipated Net income in 1 year )/(Anticipated No. of common shares in 1 year ) = (3,250,000)/(650,000) = $5`

If the company's P/E ratio remain as that of the current at 10, then

The anticipated price of stock in 1 year = Anticipated EPS * P/E ratio in 1 year

= $5 *10 = $50