Question

Sunset Corp. currently has an EPS of $3.85, and the benchmark PE for the company is 19. Earnings are expected to grow at 6 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.) b. What is the target stock price in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) C. Assuming that the company pays no dividends, what is the implied return on the company's stock over the next year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Stock price b. Stock price in one year c. Implied retur

Answer 1

a. Stock price = Benchmark PE ratio × EPS = 19 × $3.85 = $73.15

b. Stock price in one year = Benchmark PE ratio × [EPS₀(1 + g)] = 19 × [$3.85(1.06)] = $77.54

c. Implied return = (P₁ – P₀) / P₀ = ($77.54 – $73.15) / $73.15 = 0.0600 or 6.00%