?You're thinking about buying some stock in Affiliated Computer Corporation and want to use the? P/E...

?You're thinking about buying some stock in Affiliated Computer Corporation and want to use the? P/E approach to value the shares. ? You've estimated that next? year's earnings should come in at about $4.58 a share. In? addition, although the stock normally trades at a relative? P/E of 1.26 times the? market, you believe that the relative?P/E will rise to 1.41 whereas the market? P/E should be around 19.1 times earnings. Given this? information, what is the maximum price you should be willing to pay for this? stock? If you buy this stock today at ?$117.41, what rate of return will you earn over the next 12 months if the price of the stock rises to ?$148.81 by the end of the?year? (Assume that the stock? doesn't pay any? dividends.)

The maximum price you should be willing to pay for this stock is ?(Round to the nearest? cent.)

The rate of return over the next 12 months is. ?(Round to two decimal? places.)

Solutions

Expert Solution

Ans 1.

Expexted P/E would be = Relative P/E * Market P/E

= 1.41 * 19.1

= 26.93

Expexted Market Price = Expected EPS * Expected P/E

= $4.58 * 26.93

= $123.34

Ans 2.

Expected Return = (P₁ - P₀ ) / P₀

= (148.81-117.41) / 117.41

= 26.74%

jeff jeffy answered 1 year ago

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