Sully Corp. currently has an EPS of $2.35, and the benchmark PE ratio for the company is 21. Earnings are expected to grow at 7 percent per year.
Requirement 1:
What is your estimate of the current stock price? (Do not round intermediate calculations.
Stock price $
Requirement 2:
What is the target stock price in one year? (Do not round intermediate calculations.
Stock price in one year $
Requirement 3:
Assuming that the company pays no dividends, what is the implied return on the company's stock over the next year? (Do not round intermediate calculations.
Implied return %
27.35
^^^that answer was wrong
To estimate the current stock price, we can multiply the EPS by the benchmark PE ratio:
Requirement 1:
Stock price = EPS * PE ratio
Stock price = $2.35 * 21 = $49.35
Therefore, the estimate of the current stock price is $49.35.
To calculate the target stock price in one year, we need to consider the expected earnings growth rate:
Requirement 2:
Target stock price in one year = Current stock price * (1 + growth rate)
Target stock price in one year = $49.35 * (1 + 0.07) = $52.71
Therefore, the target stock price in one year is $52.71.
To calculate the implied return on the company's stock over the next year, we can use the formula:
Requirement 3:
Implied return = (Target stock price in one year - Current stock price) / Current stock price * 100
Implied return = ($52.71 - $49.35) / $49.35 * 100 ≈ 6.79%
Therefore, the implied return on the company's stock over the next year is approximately 6.79%.
To estimate the current stock price, we can use the formula:
Stock Price = EPS x PE Ratio
In this case, the EPS is $2.35, and the PE ratio is 21. So, the current stock price can be calculated as:
Stock Price = $2.35 x 21
Stock Price = $49.35
Therefore, the estimate of the current stock price is $49.35.
To calculate the target stock price in one year, we need to consider the earnings growth rate. We can use the formula:
Target Stock Price = Current Stock Price x (1 + Earnings Growth Rate)
In this case, the current stock price is $49.35, and the earnings growth rate is 7%. So, the target stock price in one year can be calculated as:
Target Stock Price = $49.35 x (1 + 0.07)
Target Stock Price = $52.79
Therefore, the target stock price in one year is $52.79.
To calculate the implied return, we can use the formula:
Implied Return = (Target Stock Price - Current Stock Price) / Current Stock Price
In this case, the target stock price is $52.79, and the current stock price is $49.35. So, the implied return can be calculated as:
Implied Return = ($52.79 - $49.35) / $49.35
Implied Return = 0.0694
Therefore, the implied return on the company's stock over the next year is 6.94%.