Question

Cute Camel Woodcraft Company just reported earnings after tax (also called net income) of 95,000,000, and a current stock price of 20.25 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 2,800,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,300,000). If Cute Camel's forecast turns out to be correct and its price-to eamings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Note: Round any EPS calculations to two decimal places, and round any P/E ratio calculation to four decimal places.)(A) $28.17 per share(B) $34.00 per share(C) $21.13 per share(D) $35.21 per share

Answer 1

$16.76 per share

Step-by-step explanation:

Price Earning Ratio = Market Price per share ÷ Earnings per share

Market Price per share = $20.25

Earnings per share =
`(Earnings\ attributable\ to\ Stockholders)/(No.\ of\ common\ stock)`

= $95,000,000/5,500,000 = $ 17.27

Price Earnings Ratio = 20.25/17.27 = 1.1726 times

Now, as per the new data,

New Net Income = 125% of 95,000,000 = 118,750,000

New no of outstanding shares = 8,300,000

New Earnings per share = $118,750,000/8300000 = $14.30

Given that price earning ratio remains the same in both years,

Market price per share after one year = Price Earnings Ratio × Earnings per share

Market Price per share after one year = 1.1726 times × 14.30 = $ 16.76 per share