Sully Corp. curently has an EPS of $2.41, and the benchmark PE ratio for the com

Question

Sully Corp. curently has an EPS of $2.41, and the benchmark PE ratio for the company is 18. 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.) Stock price 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.) Stock price in one year 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 1 decimal place, e.g., 32.2.) Implied return

Explanation / Answer

1)

Current stock price = PE ratio * EPS

Current stock price = 18 * 2.41

Current stock price = $43.38

2)

EPS1 = EPS0 ( 1 + growth rate)

EPS1 = 2.41 ( 1 + 0.05)

EPS1 = 2.5305

Stock price in year 1 = EPS1 * PE ratio

Stock price in year 1 = 2.5305 * 18

Stock price in year 1 = $45.55

3)

Implied return =( 45.55 - 43.38 ) / 43.38

Implied return = 2.17 / 43.38

Implied return = 0.05 or 5.0%

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