If Target Corp. (TGT) recently earned a profit of $6.07 earnings per share and has a P/E ratio of 16.5. The dividend has been growing at a 10 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged?What would the price be if the P/E ratio increased to 18 in five years?

Question 1:

What would be the stock price in five years if the P/E ratio remained unchanged?

$161.30

Question 2:

What would the price be if the P/E ratio increased to 18 in five years?

$175.96

Explanation:

Question 1:

What would be the stock price in five years if the P/E ratio remained unchanged?

Solution:

PV = $6.07

I = 10%

PMT = 0

N = 5

CPT FV = PV×(1+1/Y)^N

CPT FV = $6.07 × (1+0.10)^5

CPT FV = $9.78

Stock price in five years = $9.78×16.5 = $161.30 (answer)

Question 2:

What would the price be if the P/E ratio increased to 18 in five years?

CPT FV = $9.78

Price = CPT FV × 18

Price = $9.78 × 18

Price = $175.96 (answer)

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