P0 = (appropriate forward-looking P/E multiple) x EPS1 — Assume that firm's earnings per share EPS are expected next year and

Assume that a firm's earnings per share (EPS) are expected to be $2.00 next year and that analysts have determined that an appropriate forward-looking multiple is 15 times the projected earnings. What should the stock price be?

SOLUTION

P0 = (appropriate forward-looking P/E multiple) x EPS1