Shares in Anza Ltd are currently trading at a P/E ratio of 17.0.If the current price of Anza Ltd shares is $8.60,what is expected future price of the share?

Question

Quizplus · Accepted Answer

Using equation 11.22,the cost of equity capital for Anza Ltd.is simply the inverse of the P/E ratio;that is,k_e = 1/(P/E)= 1/(17.0)= 0.0588 or 5.9%.The cost of equity capital is also the expected return for the stock.Therefore,the price is expected to increase from $8.60 to 8.60(1.059)= 9.1074 or $9.11.

Shares in Anza Ltd Are Currently Trading at a P/E $6.31 \$ 6.31 $6.31

Shares in Anza Ltd Are Currently Trading at a P/E $\$ 6.31$