Fontaine Inc. recently reported net income of $5 million. It has 450,000 shares
ID: 2730548 • Letter: F
Question
Fontaine Inc. recently reported net income of $5 million. It has 450,000 shares of common stock, which currently trades at $39 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $7.75 million. Over the next year it also anticipates issuing an additional 45,000 shares of stock so that 1 year from now it will have 495,000 shares of common stock. Assuming Fontaine's price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Round your answer to the nearest cent.
Explanation / Answer
Answer: Earning per share=Net income/Number of shares outstanding
=5,000,000/450000
=$11.11 per share
Price earning ratio=Market price per share/Earning price per share
=$39/$11.11
=3.51 times
After 1 year
Earning per share=Net income/Number of shares outstanding
=7,750,000/495000
=$15.66 per share
Market price per share=Price earning ratio*earning price per share
=3.51*$15.66
=$54.97