Question
You are considering buying a stock. It pays annual dividends of $1.45 a share indefinitely. It trades at a P/E of 12.7 times earnings and
You are considering buying a stock. It pays annual dividends of $1.45 a share indefinitely. It trades at a P/E of 12.7 times earnings and has a beta of 1.40. Treasury bills are currently earning 2.1% and the market return is 11.9%. You would like to hold this stock for 3 years, at which point you think EPS will be $3.50 per share. Given that the stock currently trades at $32, what is this securitys expected return and the securitys expected value? Considering the stocks intrinsic value, explain whether or not this is a good investment. Explain the interpretation of the P/E ratio.
(hint: consider zero-growth valuation model for expected price; this can differ from an estimated price using formulas needed for expected return).
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