Question 34. Farraday National Bank has a P/E Ratio of 30 and earnings per share of $3.00. The bank expects to pay a dividend of $1.80 per share and analysts expect the earnings and dividends of the bank to grow at an above average annual rate of 15%. Given your analysis of the bank you determine that an appropriate rate of return is 17%.

1. If you purchase Farraday Bank stock at the price implied by the current price-earnings ratio what is the expected rate of return?
2. Assume further that you purchase the stock today, and during the course of the year you receive $1.80 in dividends. You then sell the stock a year later at a price of $102. What rate of return did you actually realize? Did it turn out to be good investment? Briefly explain why