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%
