Question

Sunset Corp. currently has an EPS of $2.27, and the benchmark PE for the company is 23. Earnings are expected to grow at 5.5 percent per year.

a.)what is your estimate of the current stock price?

b.)what is the target stock price in one year?

c.) what is the implied return on the companys stock over the next year?

Round all answers to 2 decimal places.

Answer 1

a. The estimate of the current stock price is computed as shown below:

= PE x EPS

= 23 x $ 2.27

= $ 52.21

b. The target stock price in one year is computed as follows:

EPS next year is computed as follows:

= EPS ( 1 + g )

= $ 2.27 ( 1 + 0.055 )

= $ 2.39485

So the target price will be:

= PE x $ 2.39485

= 23 x $ 2.39485

= $ 55.08 Approximately

c. The implied return on the company's stock over the next year is computed as follows:

= ( $ 55.08 - $ 52.21 ) / $ 52.21

= 5.50% Approximately

Feel free to ask in case of any query relating to this question