The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?
A) $13.50
B) $15.00
C) $26.50
D) $30.00

Question

Quizplus · Accepted Answer

Using the P/E ratio formula, we can find the expected future price of the stock: 
P/E ratio = Price per share / Earnings per share 
15 = Price per share / 2 
Price per share = 30 
Adding the expected dividend of $1, the future price of DEF's stock would be $31. Therefore, the best choice is D.

The Current Price of DEF Corporation Stock Is $26