An analyst forecasts the following for a stock: -the normalized trailing P/E ratio will be 12X - the stock’s price is currently $100 -the stock is expected to pay a $5 dividend this coming year on projected earnings of $10 If the analyst were to buy and hold the stock for the year, the projected rate of return based on these forecasts would be: 10% 15% 20% 25% The answer is 25%, but I have no idea how to solve this question.
P/E = 12 10 * 12 = 120 120 + 5= 125 125/100 = 1.25 - 1 = 25%
P1 = 120 based on the Trailing P/E ratio and E = 10 P0 = 100, D1 = 5, P1 = 120 So HPR = 25%
thank. I knew it had something to do with trailing P/E. Not sure about you guys, but I’m finding that I know more answers than I get right, I just don’t slow down and read the question correctly. Obviously, one reason the exam is difficult is because of time pressure. I really need to work on that. I probably could’ve gotten this question eventually.
Bigfish, years ago i was on one of the exchange trading floors in Chicago…there was a firm that printed in big letters on the top of their order tickets RTFO…it means Read the EFFING ORDER…because obviously buying versus selling and executing at the wrong price, etc. is very costly… I give you the same advice RTFQ…take an extra second (do it on your practice exams tonight) and look for things like “least likely” or “most likely”; holding period versus annualized; in ethics questions scan for words that indicate whether the analyst did thorough or in depth research or just scanned it… Don’t waste points on misreading the question.