Earnings are expected to grow at 11 percent for the next year. Using the company’s historical average PE as a benchmark, what is the target stock price in one year?
To calculate the target stock price in one year, we need to use the company's historical average Price-to-Earnings (PE) ratio. The formula to calculate the target stock price is:
Target Stock Price = Earnings per Share (EPS) * PE ratio
However, since we are provided with the growth rate of earnings (11 percent), we first need to estimate the future earnings per share (EPS) and then calculate the target stock price.
To estimate the future EPS, we'll assume that the earnings in the next year will grow by 11 percent. Let's suppose the current EPS is $10.
Future EPS = Current EPS * (1 + Growth Rate)
= $10 * (1 + 0.11)
= $10 * 1.11
= $11.10
Now, using the historical average PE ratio as a benchmark, we'll calculate the target stock price by multiplying the future EPS by the PE ratio. Let's suppose the historical average PE ratio is 20.
Target Stock Price = Future EPS * PE ratio
= $11.10 * 20
= $222
Therefore, the target stock price in one year, based on the given earnings growth rate and historical average PE ratio, would be $222.