New York Times Co. (NYT) recently earned a profit of $1.31 per share and has a P/E ratio of 19.25. The dividend has been growing at a 6.50 percent rate over the past six years.
If this growth rate continues, what would be the stock price in four years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 23 in four years? (Round your answers to 2 decimal places.)
Stock price $
Stock price with new P/E $
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To calculate the future stock price in four years, we need to use the dividend growth model formula, which is:
Stock Price = Dividend per Share / (Required Rate of Return - Dividend Growth Rate)
First, let's calculate the dividend per share in the fifth year using the given information about the growth rate:
Dividend per Share = $1.31 * (1 + 6.50%)^4
Dividend per Share = $1.31 * (1 + 0.065)^4
Dividend per Share = $1.31 * (1.065)^4
Dividend per Share = $1.31 * 1.288084
Dividend per Share = $1.68755604 (rounded to two decimal places)
Now, let's calculate the future stock price in four years assuming the P/E ratio remains unchanged at 19.25:
Stock Price = $1.68755604 / (19.25 - 6.50%)
Stock Price = $1.68755604 / (0.1925)
Stock Price = $8.77 (rounded to two decimal places)
The stock price in four years, assuming the P/E ratio remains unchanged, would be $8.77.
Next, let's calculate the future stock price in four years assuming the P/E ratio increases to 23:
Stock Price with new P/E = $1.68755604 / (23 - 6.50%)
Stock Price with new P/E = $1.68755604 / (0.23)
Stock Price with new P/E = $7.34 (rounded to two decimal places)
The stock price in four years, assuming the P/E ratio increases to 23, would be $7.34.