Question

Kellogg Co. (K) recently earned a profit of $2.52 earnings per share and has a P/E ratio of 13.5. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate 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 declined to 12 in five years?

Answer 1

$43.4187 ; $38.5944

Step-by-step explanation:

The formula to compute the price earning ratio is shown below:

Price-earnings ratio = (Market price per share) ÷ (Earning per share)

a. In the first case,

Price-earning ratio is 13.5

Earning per share in five years would be

= 2.52 × (1 + 0.05)^5

= 2.52 × (1.05)^5

= $3.2162

Now if we apply the above formula, so the market price per share would be

= 13.5 × $3.2162

= $43.4187

In the second case

If the P/E ratio is decreased to 12, then the price would be

= 12 × $3.2162

= $38.5944