Summers Corp. currently has an EPS of $3.00, and the benchmark PE for the compan

Question

Summers Corp. currently has an EPS of $3.00, and the benchmark PE for the company is 29. Earnings are expected to grow at 5 percent per year.

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.)

What is the target stock price in one year? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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.)

Explanation / Answer

Summers Corporation All Amounts in $ a. Current EPS = $ 3 P/E Ratio = 29 Hence Price per share / $ 3 = 29 Thus, the current price of the stock will be 29 X $ 3 = $ 87.00. b. The EPS is expected to grow at 5% per year Thus, the EPS after one year will be $ 3 X 105% = $ 3.15 Considering the same P/E base of 29, The price of the stock after one year will be $ 3.15 X 29 = 91.35 $ c. The change in the price of the stock after one year is $ 4.35 Thus, the implied rate of return on the stock will be $ 4.35 / $ 91.35 = 4.76%

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