You have found the following historical information for the Daniela Company over the past four years: Year 1 Year 2 Year 3 Year 4 Stock price $ 49.18 $ 53.18 $ 58.14 $ 56.32 EPS 2.35 2.47 2.78 3.04 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 one year from today? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

The target stock price one year from today is $ 69.09

Explanation:

1. Let's review the information given to us to solve the problem correctly:

                     Year 1 Year 2 Year 3 Year 4

Stock price $ 49.18 $ 53.18 $ 58.14 $ 56.32

EPS               $ 2.35    $ 2.47   $ 2.78   $ 3.04

Earnings are expected to grow at 11 percent for the next year.

2. Using the company’s historical average PE as a benchmark, what is the target stock price one year from today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Let's calculate the PE, this way:

PE = Market value per share

/Earnings per share

                        Year 1       Year 2      Year 3      Year 4

PE                  49.18/2.35 53.18/2.47 58.14/2.78 56.32/3.04

PE                  20.92766  21.53036   20.91366    18.52632

PE Average = 20.92766 + 21.53036 + 20.91366 + 18.52632 / 4

PE Average = 81.898 / 4 = 20.4745

EPS for Year 5 = EPS Year 4 + 11%

EPS for year 5 = 3.04 * 1.11 = 3.3744

Now, we can find out the target stock price for Year 5, this way:

Target stock price = PE Average * EPS for Year 5

Target stock price = 20.4745 * 3.3744

Target stock price = $ 69.09

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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