Question

Sunset Corp. currently has an EPS of $2.09, and the benchmark PE for the company is 18. Earnings are expected to grow at 6.5 percent per year.
Required:
a. What is your estimate of the current stock price?
b. What is the target stock price in one year?
c. Assuming the company pays no dividends, what is the implied return on the company's stock over the next year?

Answer 1

Answer:

a. The estimate of the current stock price is $37.62

b. The target stock price in one year is $40.065

c. The implied return on the company's stock over the next year, Assuming the company pays no dividends is 6.51%

Explanation:

a. In order to calculate estimate of the current stock price would have to mak the following calculation:

current stock price=EPS*PE

current stock price=$2.09*18

current stock price=$37.62

The estimate of the current stock price is $37.62

b. To calculate the target stock price in one year we would have to make the following calculation:

target stock price in one year=EPS in one year* PE

EPS in one year=EPS*(1+percentage of Earnings expected to grow)

EPS in one year=$2.09*(1+0.065)

EPS in one year=$2.226

Therefore, target stock price in one year=$2.226*18

target stock price in one year=$40.065

The target stock price in one year is $40.065

c. To calculate the implied return on the company's stock over the next year Assuming the company pays no dividends we would have to use the following formula:

implied return on the company's stock over the next year=P1-P0/P0

implied return on the company's stock over the next year=$40.065-$37.62/$37.62

implied return on the company's stock over the next year=6.51%

The implied return on the company's stock over the next year, Assuming the company pays no dividends is 6.51%