An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is

Question

Quizplus · Accepted Answer

The capitalized earnings model formula is: 
Intrinsic value per share = Earnings per share (EPS) / Required rate of return (r)
We are given the intrinsic value per share as $20 and we need to solve for the expected EPS of HPQ. Rearranging the formula, we get:
EPS = Intrinsic value per share × Required rate of return
Assuming the required rate of return is the same as the typical P/E ratio of 25 in the industry, we have:
EPS = $20 × (1/25) = $0.80
Therefore, the expected EPS of HPQ in the coming year is $0.80, which corresponds to choice C.

An Analyst Has Determined That the Intrinsic Value of HPQ