Question

Green Caterpillar Garden Supplies Inc. just reported earnings after tax (also called net income) of $9,750,000, and a current stock price of $14.74 per share. The company is forcasting an increase of 25% of its after-tax income next year, but it also expects it will have to issue 2,900,000 new stock (raising its shares outstanding from 5,500,00 to 8,400,000).

If Green Caterpillar's forceast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Round an P/E ratio calculation to four decimal places).

a. $12.08 per share
b. $14.75 per share
c. $9.06 per share
d. $15.10 per share

Answer 1

Answer:

a. $12.08 per share

Explanation:

For computing the next year stock we have to do the following calculations  

Current Earning per share  = Net Income ÷ Number of Common Shares Outstanding

= $9,750,000 ÷ 5,500,000 shares  

= $1.77

Current Price Earning ratio = Current stock price ÷  Current EPS

= $14.74 ÷ $1.77

= 8.33

Now Next year earning per share = $9,750,000 ×  1.25 ÷ 8,400,000 shares = $1.45

So, the next year stock price = $1.45 x 8.33

= $12.08 per share