Ramsay Corp. currently has an EPS of $3.20, and the benchmark PE for the company
ID: 2822036 • Letter: R
Question
Ramsay Corp. currently has an EPS of $3.20, and the benchmark PE for the company is 31. 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 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 and enter your answer as a percent rounded to the nearest whole number, e.g., 32.)
Ramsay Corp. currently has an EPS of $3.20, and the benchmark PE for the company is 31. Earnings are expected to grow at 5 percent per year.
Explanation / Answer
a)
PE ratio = Price / EPS
31 = price / 3.2
Price = $99.2
b)
EPS1 = EPS0 ( 1 + growth rate)
EPS1 = 3.2 ( 1 + 0.05)
EPS1 = 3.36
PE ratio = Price1 / EPS1
31 = Price1 / 3.36
Price1 = $104.16
c)
Implied return = [( 104.16 - 99.2) / 99.2] * 100
Implied return = 5%
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