Question

Cute Camel Woodcraft Company just reported earnings after tax (also called net income) of $9,250,000 and a current stock price of $39.50 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 3,000,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,500,000). If Cute Camel's forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now?

Answer 1

Current Price $39.50

Current Earnings = 9,250,000

Current EPS= 9,250,000/5,500,000= $1.681

Current P/E = 39.5/1.681=23.5

Next year Income =1.25*9250000=11,562,500

Next year No of shares= 8,500,000

EPS= 11,562,500/8500000=1.36

IF PE Ratio remains the same

23.5=Price/1.36

Price= 23.5*1.36= $31.9

Step-by-step explanation: