Plush Pilots, Inc., has balance sheet equity of $5.1 million. At the same time,
ID: 2651122 • Letter: P
Question
Plush Pilots, Inc., has balance sheet equity of $5.1 million. At the same time, the income statement shows net income of $724,200. The company paid dividends of $416,415 and has 150,000 shares of stock outstanding. If the benchmark PE ratio is 20, what is the target stock price in one year?
Plush Pilots, Inc., has balance sheet equity of $5.1 million. At the same time, the income statement shows net income of $724,200. The company paid dividends of $416,415 and has 150,000 shares of stock outstanding. If the benchmark PE ratio is 20, what is the target stock price in one year?
Explanation / Answer
In the question,
Earning per share = $724,200 / 150,000
= $4.828
Growth rate = Retention rate * Return on equity
= (Net income - Dividend paid) / Net income * Net income / Equity capital
= (Net income - Dividend paid) / Equity capital
= ($724,200 - $416,415) / $5,100,000
= 6.035%
Therefore expected earning one year hence = Present earning per share * (1 + growth rate)
= $4.828 * (1 + 6.035%)
= $5.119
Now, P/E = Price per share / Earning per share = 20
=> Price per share one year hence / Earning per share one year hence = 20
=> Price per share one year hence = 20 * Earning per share one year hence
= 20 * $5.119
= $102.39 ~ $102 is the target stock price in one year