Fontaine Inc. recently reported net income of $10 million. It has 260,000 shares

Question

Fontaine Inc. recently reported net income of $10 million. It has 260,000 shares of common stock, which currently trades at $25 a share. Fontaine continues to expand and anticipates that one year from now its net income will be $12.5 million. Over the next year it also anticipates issuing an additional 65,000 shares of stock, so that one year from now it will have 325,000 shares of common stock. Assuming its price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Round your answer to two decimal places.

Explanation / Answer

first calculate current year earnings per share (EPS) = $10 million / 260000 = $38.4615 per share price earnings ratio P/E = price per share / EPS = $25/$38.4615 = 0.65 future eps= future earnings / future shareholdings =12.5million/325000 = $38.4615 since P/E is constant --> 0.65= future price/ future eps therefore the price will remain the same at $25 per share

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