Target Corp. (TGT) recently earned a profit of $3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at a 14 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 23 in five years?
A) $118.85, $158.01 respectively
B) $137.19, $182.39 respectively
C) $173.87, $231.15 respectively
D) $308.81, $410.55 respectively

Question

Quizplus · Accepted Answer

The correct answer is A because the P/E ratio is expected to remain unchanged, and the dividend is expected to continue growing at a 14 percent rate. This means that the stock price is expected to increase by 14 percent each year, and the P/E ratio will remain at 17.3. Therefore, the stock price in five years would be $118.85, and if the P/E ratio increased to 23 in five years, the stock price would be $158.01.