Question

Taggart Goods Corp. just reported a net income of $8,000,000, and its current stock price is $17.50 per share. Taggart is forecasting an increase of 25% for its net income next year, but it also expects it will have to issue 2,400,000 new shares of stock (raising its shares outstanding from 5,500,000 shares to 7,900,000 shares). If Taggart’s forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does management expect its stock price to be one year from now? (Hint: If you choose to compute the firm’s price/earnings ratio, round its value to four decimal places.)

Answer 1

The expected stock price of Taggart Goods Corp. one year from now, assuming a constant P/E ratio and the forecasted net income increase and share issuance, is approximately $15.24 per share.

Step-by-step explanation:

To find out the expected stock price of Taggart Goods Corp. one year from now, we can use the current data and the projections provided. We start with calculating the current Price-to-Earnings (P/E) ratio, which is the stock price divided by the earnings per share (EPS).

The current EPS is computed by taking the net income of $8,000,000 and dividing it by the number of shares outstanding, which is 5,500,000 shares, giving us an EPS of $1.4545 after rounding to four decimal places. The P/E ratio is therefore the current stock price of $17.50 divided by the EPS of $1.4545, which gives us a P/E ratio of roughly 12.0303 after rounding to four decimal places.

Next year, the net income is expected to increase by 25%, resulting in a net income of $10,000,000. However, the number of shares outstanding will also increase to 7,900,000 shares. The forecasted EPS is the new net income divided by the new number of shares, which gives us an EPS of approximately $1.2658. Assuming the P/E ratio remains the same, the expected stock price one year from now can be calculated by multiplying the forecasted EPS by the current P/E ratio, which results in an expected stock price of about $15.24 per share.

Answer 2

$15.2279

Step-by-step explanation:

Current P/E = Price per share * Share outstanding / Net Income

Current P/E = 17.5 * 5,500,000 / 8,000,000

Current P/E = 12.03

The Current P/E will remain the same next year

Next year P/E = Price * (New shares + Existing shares) / Next year earnings

12.03 = Price * (5,500,000 + 2,400,000) / 8,000,000 * 1.25

12.03 = Price * (7,900,000) / 10,000,000

12.03 * 10,000,000 = Price * (7,900,000)

Price = 120,300,000 / 7,900,000

Price = 15.22785

Hence, the price of shares next year will be $15.2279