Question

A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3

Answer 1

Stock price = $53.28

Step-by-step explanation:

DATA

Earnings = $1,480,000

Shares outstanding = 500,000

P/E ratio = 18

Stock price = ?

he firm's expected stock price for year 3 can be calculated by using Price earning ratio formula

Formula:

P/E ratio = Stock price / EPS

Stock price = P/E ratio x EPS

Stock price = 18 x $2.96(w)

Stock price = $53.28

Workings

EPS = Earning per share

EPS = Earning /Shares

EPS = $1,480,000 /500,000

EPS = $2.96