Question

The current price of Parador Industries stock is $78 per share. Current earnings per share are $5.1, the earnings growth rate is 4 percent, and Parador does not pay a dividend. The expected return on Parador stock is 22 percent.

1.
Calculate the earning per share one-year ahead. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

2.
Calculate the P/E ratio one-year ahead. (Round your answer to 2 decimal places.)

Answer 1

1. $5.3

2. 17.95

Step-by-step explanation:

1. Earning per share today = $5.1

Earning growth in one year = 4%

So, the EPS one-year ahead:

= Earning per share today × (1 + Earning growth in one year)

= 5.1 × 1.04

= $5.3

2 . Market price one-year ahead:

= Current price × (1 + expected return on Parador stock)

= 78 × 1.22

= $95.16.

P/E Ratio = Market price per share ÷ Earning per share

P/E Ratio = 95.16 ÷ 5.3

= 17.95