Question

Last year, Rec Room Sports reported earnings per share of $8.40 when its stock price was $201.60. This year, its earnings increased by 25 percent. If the P/E ratio remains constant, what is likely to be the price of the Stock?

Answer 1

To find the likely price of the stock, calculate the new earnings per share by multiplying the previous earnings per share by 1.25. Then, use the P/E ratio to find the likely stock price by multiplying the P/E ratio with the earnings per share. The likely price of the stock this year is $252.00.

Step-by-step explanation:

To find the likely price of the stock, we first need to calculate the earnings for this year. Since the earnings increased by 25 percent, we can calculate the new earnings per share by multiplying the previous earnings per share by 1.25.

New Earnings per Share = $8.40 x 1.25 = $10.50

Next, we can use the P/E ratio to find the likely price of the stock. The P/E ratio is the price-to-earnings ratio, which represents the price investors are willing to pay for each dollar of earnings.

P/E Ratio = Stock Price / Earnings per Share

Since the P/E ratio remains constant, we can use the previous P/E ratio to calculate the likely stock price this year.

Stock Price = P/E Ratio x Earnings per Share

Substituting the values, we get:

Stock Price = $201.60 x ($10.50 / $8.40) = $252.00

Therefore, the likely price of the stock this year is $252.00.

Answer 2

The price of the Stock to be $252

Step-by-step explanation:

As per available data

Earnings per share = $8.40

Stock price = $201.60

Calculate the P/E ratio

P/E ratio = Price / Earnings per share = $201.60 / $8.40 = 24

First calculate the increased earings per share

Increased earnings per share = $8.40 x ( 1 + 25% ) = $10.5 per share

By taking the P/E ratio constant we can calculate the price of stock using increased eanring per share

P/E ratio = Price / Increased Earnings per share

24 = Price / $10.5

Price = $10.5 x 24

Price = $252