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Ferrell Inc
Ferrell Inc. recently reported net income of
$8 million. It has 540,000 shares of common stock, which currently trades at
$21 a share. Ferrell continues to expand and anticipates that 1 year from
now its net income will be $13.2 million. Over the next year, it also
anticipates issuing an additional 81,000 shares of stock so that 1 year from
now it will have 621,000 shares of common stock. Assuming Ferrell’s
price/earnings ratio remains at its current level, what will be its stock price 1
year from now?
Expert Solution
Computation of Stock Price 1 Year from Now:
Earnings per Share (EPS) = Net Income/Number of Shares Outstanding
= $8,000,000/540,000
= $14.81 per share
PE Ratio = Market Price per Share/Earnings per Share (EPS)
= $21/$14.81
= 1.42 times
EPS in Year 1 = Net Income/Number of Shares Outstanding
= $13,200,000/(540,000+81,000)
= $13,200,000/621,000
= $21.26 per share
Price 1 Year from Now = PE Ratio*EPS in Year 1
= 1.42*$21.26
Price 1 Year from Now = $30.13
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