Toys Galore has historically had a P/E ratio of 18.5. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $2.10. 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)$40.79
C)$41.30
D)$42.78
E)$43.79

Question

Quizplus · Accepted Answer

The expected price of the stock one year from now can be calculated by first determining the expected earnings per share (EPS) for next year and then applying the historical P/E ratio. The expected EPS for next year is $2.10 * (1 + 5%) = $2.205. Applying the P/E ratio of 18.5, the expected stock price is $2.205 * 18.5 = $40.79.

Toys Galore Has Historically Had a P/E Ratio of 18