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?
A) $100.16, $109.26 respectively
B) $161.30, $175.96 respectively
C) $259.78, $283.39 respectively
D) $261.30, $275.96 respectively

Question

Quizplus · Accepted Answer

To find the stock price in five years, first calculate the future earnings per share (EPS) assuming a 10% growth rate. The formula for future value is FV = PV * (1 + r)^n, where PV is the present value, r is the rate, and n is the number of periods. Here, PV = $6.07, r = 10% or 0.10, and n = 5 years. So, FV = $6.07 * (1 + 0.10)^5 = $6.07 * 1.61051 ≈ $9.77. For a P/E ratio of 16.5, the stock price = $9.77 * 16.5 ≈ $161.30. If the P/E ratio increases to 18, the stock price = $9.77 * 18 ≈ $175.96.