Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years from now. A comparable firm currently has a stock price of $20 per share, 100,000 shares outstanding, and net income of $50,000.

Question

Quizplus · Accepted Answer

Use the P/E ratio method to determine the future stock price of the target venture. 
P/E ratio = Price per Share/Earnings per Share 
Comparable firm's P/E ratio = $20/$50,000 = 0.0004 
Future stock price of target venture = P/E ratio * Net income of target venture = 0.0004 * $40,000 = $16 
Future market capitalization of target venture = Future stock price * Number of shares outstanding = $16 * 100,000 = $1.6 million.

Determine the Future Value of a Target Venture Which Has