1. Electronics Galore has historically had a P/E ratio of 23.4. This ratio is co
ID: 2717711 • Letter: 1
Question
1. Electronics Galore has historically had a P/E ratio of 23.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $1.68. These earnings are expected to increase by 4.2 percent next year. What is the expected price of this stock one year from now?
A. $39.31
B. $40.96
C. $41.25
D. $42.78
E. $43.79
2.
Historically, Jones Trucking has had a P/E ratio of 14.6. The firm has current net income of $92,000 with 85,000 shares of stock outstanding. The EPS growth rate is 4.5 percent. What is the expected price of this stock one year from now?
A. $15.32
B. $15.85
c. $16.41
D. $16.51
E. $17.10
Explanation / Answer
Answer (1)
Expected price next year B. $ 40.96
P/E ratio = 23.4
Current EPS = $ 1.68
Growth rate of EPS = 4.2% or 0.042
Expected EPS next year = $ 1.68 * 1.042 = $ 1.75056
Expected Price = P/E ratio * EPS = 23.4 * $ 1.75056 = $ 40.963104 or $ 40.96 (rounded off)
Answer (2)
Expected price next year D. $ 16.51
P/E ratio = 14.6
Current net Income = $ 92,000
Number of Shares outstanding = 85,000
EPS growth rate = 4.5% or 0.045
EPS = Net Income / Number of shares outstanding = $ 92,000/85,000
= $ 1.0823529 or $ 1.08 (rounded off)
Expected EPS next year = $ 1.08 * 1.045 = $ 1.13105882 or $ 1.13 (rounded off)
Expected Price = P/E ratio * Expected EPS = 14.6 * $ 1.13 = $ 16.5134 or $ 16.51 (rounded off)
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