Question

In Dec 2019, the Yahoo! Finance website provided the following information for the stock of Zoracle:                                                            
                        Trailing P/E:    12.70                                      
                        Forward P/E:   14.80                                      
                        Earnings growth rate: 2.10%                                     
If you assume that the earnings growth rate represents the long -run earnings growth rate for the firm, what is the implied rate of return required by investors? Round your answer to the nearest tenth of a percent.

Answer 1

Answer Calculate the implied rate of return as follows: Implied rate of return = [(1/Forward PE) > 100] + [Earnings growth rate) = [(1/14.80) > 100] + [2.1%] = 6.8% + 2.1% = 8.9%