The stock of East/West Maps is currently selling for $122.40, which equates to a P/E ratio of 24×.
a. Using the P/E ratio, compute the current EPS of East/West.
b. Assume that earnings next year increase by 10 percent, but the P/E ratio drops to 20×, which is more in line with the industry average. What will be the price of East/West’s stock next year?
c. If an investor purchases the stock today for $122.40 and sells it in one year at the price computed in part (b), what rate of return would be earned?