Electronics Galore has historically had a P/E ratio of 22.1. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $1.78. These earnings are expected to increase by 5.0 percent next year. What is the expected price of this stock one year from now?
A)$39.31
B)$40.96
C)$41.30
D)$42.78
E)$43.79

Question

Quizplus · Accepted Answer

Using the P/E ratio and EPS, we can calculate the current stock price:

Current stock price = P/E ratio * EPS = 22.1 * $1.78 = $39.438

Next, we can use the expected EPS growth rate to calculate the expected EPS for next year:

Expected EPS = Current EPS * (1 + EPS growth rate) = $1.78 * (1 + 0.05) = $1.869

Finally, we can use the expected P/E ratio and expected EPS to calculate the expected stock price one year from now:

Expected stock price = Expected P/E ratio * Expected EPS = 22.1 * $1.869 = $41.2899 ≈ $41.30

Therefore, the best choice is C.

Electronics Galore Has Historically Had a P/E Ratio of 22