Question

Domergue Corp. currently has an EPS of $3.76, and the benchmark PE for the company is 21. Earnings are expected to grow at 5.1 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 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.)

Answer 1

Answer:

a. $78.96

b. $82.99

c. 5.10%

Explanation:

The computation is shown below:

a. Estimated stock price would be

= EPS  × Benchmark P/E Ratio

= $3.76 × 21

= $78.96

b. Target stock price would be

= EPS(1 + growth rate) ×Benchmark P/E Ratio

= $3.76(1 + 0.051) × 21 times

= $3.95 × 21 times

= $82.99

c. Implied return on the company’s stock

= {(Target stock price – estimated stock price) ÷ estimated stock price} x 100

= {($82.99 – 78.96) ÷ 78.96}   × 100

= {$4.03 ÷78.96} × 100

= 5.10%