To determine: The high and low target stock prices over the next year.
Introduction:
Target stock price is a price in which the investor wants to exit from the current position to attain maximum earnings.
Answer to Problem 28QP
The high target stock prices over the next year are $76.95.
The low target stock prices over the next year are $60.79.
Explanation of Solution
Given information:
The high price of Year 1, Year 2, Year 3, and Year 4 is $48.60, $57.34, $69.46, and $74.85 respectively. The low price of Year 1, Year 2, Year 3, and Year 4 is $37.25, $42.18, $55.85, and $63.18 respectively. The earnings per share of Year 1, Year 2, Year 3, and Year 4 are $2.35, $2.48, $2.63, and $2.95. The projected earnings growth rate for next year is 9%.
Formulae:
The formula to calculate next year’s earnings per share:
Where,
EPS1refers to the earnings per share of next year,
EPSorefers to the current year’s earnings per share,
g refers to the expected growth rate.
The formula to calculate high or low price to earnings ratio:
The formula to determine average high or low price to earnings:
The formula to calculate the price of a share of stock:
Where,
EPS1 refers to the earnings per share of next year,
P1 refers to the price of stock per share.
Note:
The current stock price is often called as high or low target stock prices over the next year.
Compute the next year’s earnings per share:
Hence, the next year’s earnings per share are $3.22.
Compute the high price to earnings ratio of Year 1:
Hence, the high price to earnings ratio of Year 1 is $20.68.
Compute the high price to earnings ratio of Year 2:
Hence, the high price to earnings ratio of Year 2 is $23.12.
Compute the high price to earnings ratio of Year 3:
Hence, the high price to earnings ratio of Year 3 is $26.41.
Compute the high price to earnings ratio of Year 4:
Hence, the high price to earnings ratio of Year 4 is $25.37.
Compute the average high price to earnings:
Hence, the average high price to earnings ratio is $23.90.
Compute the high price of a share of stock:
Hence, high price of a share of stock is $76.95.
Compute the low price to earnings ratio of Year 1:
Hence, the low price to earnings ratio of Year 1 is $15.85.
Compute the low price to earnings ratio of Year 2:
Hence, the low price to earnings ratio of Year 2 is $17.01.
Compute the low price to earnings ratio of Year 3:
Hence, the low price to earnings ratio of Year 3 is $21.24.
Compute the low price to earnings ratio of Year 4:
Hence, the low price to earnings ratio of Year 4 is $21.42.
Compute the average low price to earnings:
Hence, the average low price to earnings ratio is $18.88.
Compute the low target price (price of a share of stock):
Hence, the low price of a share of stock is $60.79.
Want to see more full solutions like this?
Chapter 7 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company: High price Low price EPS Year 1 $ 85.61 68.33 6.46 a. High target price b. Low target price Year 2 $94.99 79.75 8.88 Year 3 $ 116.05 84.23 8.54 Year 4 $ 128.08 105.86 10.13 Earnings are expected to grow at 5.5 percent over the next year. a. What is the high target stock price over the next year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the low target stock price over the next year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forwardSuppose that the annual return for particular stock follows the same distribution every year, and that the return for any given year is independent of the returns for any prior years. Based on an analysis of the stock's annual returns over an 12 year period, it is determined that the 95% confidence interval for the stock's expected annual return is given by (-0.1724, 0.2861). Find the volatility of the stock. Use the approximation formula from Berk and DeMarzo. 38.52% 40.90% 42.09% 37.32% 39.71%arrow_forwardYou have developed data which give (1) the average annual returns of the market for the past five years and (2) similar information on Stocks A and B. If these data are as follows, which of the possible answers best describes the historical beta for A and B? Please circle the correct answer: Years Market Stock A Stock B 1 .03 .16 .05 2 -.05 .20 .05 3 .01 .18 .05 4 -.10 .25 .05 5 .06 .14 .05 a. bA > 0; bB = 1. b. bA > +1; bB = 0. c. bA = 0; bB = -1. d. bA < 0; bB = 0. e. bA < -1; bB = 1.arrow_forward
- The table below presents the returns on stocks ABC and XYZ for a five-year period. Year ABC XYZ 1 0.16 0.12 2 0.42 0.62 3 -0.02 -0.23 4 -0.26 -0.62 5 0.48 0.52 Calculate the average return, and standard deviation of stock ABC and XYZ. Also calculate the correlation between the two stocks. What does the correlation tell you about the return movements of the two stocks? Calculate the weight of each stock in the minimum variance portfolio, assume the expected return equals to average return for each stock. Find the mix of stocks ABC and XYZ that gives a portfolio on the efficient frontier AND demonstrate why this portfolio is on the efficient frontier by showing that there exists another portfolio of stocks ABC and XYZ that has the same level of risk (portfolio standard deviation) but inferior return. Hint: manipulate the weights you get from part b. Suppose the risk-free rate is 6%. Also assume the…arrow_forward(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) Common Stock B Return 13% 14% 18% Return - 6% 7% 15% 21% a. Given the information in the table, the expected rate of return for stock A is 14.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.)arrow_forwardThe following table represents the rate of returns of two stocks in different economic conditions along with their probabilities (the data are also uploaded on moodle) RATES OF RETURN ON STOCKS EXPECTED ECONOMIC PROBABILITY STOCK A STOCK B CONDITIONS RECESSION 0.55 -0.04 -0.02 STABLE 0.35 0.25 0.30 EXPANDING 0.10 0.15 0.20 Answer the following by using mathematical calculations: a) Calculate the expected rate of return for each stock respectively. Explain what the expected value implies. b) Calculate the standard deviation for each stock respectively. Explain what the standard deviation implies. c) If you were an investor in which stock you were going to invest? Justify your answer. d) Calculate the covariance between Stock A and stock B. Discuss. e) Calculate the expected return and the standard deviation of the portfolio consisting 40% in stock A and 60% in stock B. f) Discuss the risk and return associated with investing i All of your funds in stock A ii. All of your funds in stock…arrow_forward
- A stock recently has been estimated to have a beta of 1.24:a. What will a beta book compute as the “adjusted beta” of this stock?b. Suppose that you estimate the following regression describing the evolution of beta over time:βt = .3 + .7βt−1What would be your predicted beta for next year?arrow_forwardSuppose that we wanted to sum the 2007 returns on ten shares to calculate the return on a portfolio over that year. What method of calculating the individual stock returns would enable us to do this? Select one: a. Simple b. Neither approach would allow us to do this validly c. Either approach could be used, and they would both give the same portfolio return d. Continuously compoundedarrow_forwardAn analyst gathered the following information for a stock and market parameters: stock beta = 0.757; expected return on the Market = 11.65%; expected return on T-bills = 3.02%; current stock Price = $9.92; expected stock price in one year = $8.20; expected dividend payment next year = $2.92. Calculate the required return and expected return for this stock. Please write your answers as percentages (e.g. 1234 should be written as 12.34): A. Required Return: B. Expected Return: % %arrow_forward
- Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."arrow_forward(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) ew an example Get more help. T 3 a. Given the information in the table, the expected rate of retum for stock A is 15.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.) E D 80 73 Return. 12% 16% 18% U с $ 4 R F 288 F4 V Common Stock B % 5 T FS G 6 Return -7% 7% 13% 21% B MacBook Air 2 F& Y H & 7 N 44 F? U J ** 8 M | MOSISO ( 9 K DD O . Clear all : ; y 4 FIX { option [ + = ? 1 Check answer . FV2 } ◄ 1 delete 1 return shiftarrow_forwardName the econometric term used for estimating the correlation between today’s stock price and the price of previous days (lag prices).arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning