P/E Ratio , EPS and stock price

[lebanoncfa]

An analyst forecasts the following for the stock:
- The normalized trailing price earnings (P/E) ratio will be 12x
- The stock price is currently $100
- The stock ois expected to pay a $5 dividend this coming year on projected earnings of $10

If analysts were to buy and hold the stock for the year, the projected rate f return based on these forecasts would be:
A. 10%
B. 15%
C. 20%
D. 25%

Answer:
The forecast year-end price, P, is:

P= EPS x (P/E)

Then they compute HPR using above expected price less price in given plus expected dividend also in given....

Answer is D

My question: Note that P/E is the normalized TRAILING P/E ratio as given here� so does the relation P = EPS x (P/E) hold because the price is expected to grow as much as earnings have in percentage terms?

 

[mcpass]

The trailing P/E ratio is the P/E that the analyst expects to see again and again and again.

Therefore, if he knows that the projected earnings are 10, he will expect a corresponding stock price of 10 x 12 = 120.

With a dividend in the same year, he earns 5 from the dividend, 20 in capital gains = 25. His initial investment was 100 so 25/100 = 0.25 or 25%.

Hope this helps.

 

[lebanoncfa]

Yep...

Thanks mc... did i get 80% and i'm asking this question??? Makes sense if i come from a non-finance background ;-) which is the case... This exam has surely got me all shook up.