Question

Please also include work in the BA 2 Plus Calculator if possible with this question.

Summers Corp. currently has an EPS of $2.40, and the benchmark PE for the company is 23. Earnings are expected to grow at 5 percent per year. a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current stock price $ [ b. What is the target stock price in one year? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) Target stock price C. Assuming the company pays no dividends, what is the implied return on the company's stock over the next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Implied return of stock D %

Answer 1

EPS=$2.40

Benchmark PE for the company =23

Earnings are expected to grow at 5% per year. G=0.05

a. Estimate of the current stock price= Benchmark PE for the company * EPS = 23 * $2.40 = $55.2

b.

Revised EPS = EPS(1+G)= $2.40(1+0.05)=$2.52

Target stock price in one year = Benchmark PE for the company* Revised EPS = 23*2.52 =$57.96

C. Implied Return = (Target stock price in one year-Estimate of the current stock price) / Estimate of the current stock price

=(57.96 - 55.2) /55.2 = 2.76/55.2 = 0.05 or 5%