P/E Ratio Model and Future Price 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 a multiple of the earnings per share, so the stock price is equal to the P/E ratio multiplied by the earnings per share. If the P/E ratio remains unchanged, the stock price will increase at the same rate as the earnings per share. If the P/E ratio increases, the stock price will increase at a faster rate than the earnings per share.