Step $4-$ Calculate the Stock's Potential Rate of Return

The potential rate of return for an investment over a period of years can be determined by adding the anticipated income $($from dividends, interest, rent, or other sources$)$ to the future value of the investment and then subtracting the investment's original cost.

Suppose that you have determined that Twin$-$Cities Power & Light is currently trading at $$20$ per share, its most recent $12-$month earnings amounted to $$2\mathrm{.}50$ per share, and the cash dividend for the same period was $$0\mathrm{.}50$ per share.

Begin by projecting the future value of one share of stock by using the earnings per share $($EPS information$).$ In this case, the price$-$to$-$earnings ratio is