Question

On 3/31/19, you bought 100 shares of Quinn Corporation (Symbol QCO) for $23.00. The prior twelve month’s earnings per share (EPS) were $2.00 per share. The consensus of Wall Street analysts is that earnings will to grow by a stunning 40% in the next year due to the insightful and visionary management of its eponymous manager and controlling shareholder, yours truly. Despite having to finance such prodigious growth, the stock paid a dividend of $0.15 last quarter and announced on the day before your purchase that it will increase the dividend to $0.20 next quarter. You sell the stock on 9/30/19 for $35.00.

1. What was QCO’s trailing Price/Earnings (“P/E”) ratio when you bought the stock? (2 pts)
2. What is the problem with the notion of “consensus” earnings and/or earnings growth estimates? (2 pts.)
3. What was QCO’s projected P/E ratio when you bought the stock? (3 pts)
4. Which, if any, of these two is a good P/E ratio? (1 pt)
5. What was QCO’s dividend yield when you bought the stock? (2 pts) (Remember that dividend yields are calculated based on annual payouts!)
6. What was QCO’s P/E / Growth (“PEG”) ratio when you bought the stock? (3 pts)
7. Is this a good PEG ratio? (2 pts)
8. Assuming the quarterly dividend held steady at $0.20, what was your total return, in dollars and percentages, on your QCO holding? (5 pts)
9. Was this a good return? (2 pts)

Answer 1

1. PE Ratio = MArket Price/ EPS= 23/2= 11.5

2. As the PE ratio is high, the consensus strikes with the view of 40% EPS growth.

3. Projected PE Ratio= MP/Current EPS= 23/2+2*40%= 8.21

4. PE ratio of 8.21 is good as per the investor expectations as it represents company is doig exceptionally well relative to its past trends.

5. Divident Yield= Annual divident/ Market price= 0.15*4/23= 0.026

6. PEG Ratio= PE ratio/ Growth on EPS= 11.5/40= 0.2875

7. No, PEG ratio is not enough to ustify its PE ratio

8. Total return in $= 35-23+.2*2= 12.4*100 = $1240

In %= 1240/2300= 53.91%

Yes, this was good return in comparison with earning increament.