Question

Merck’s earnings per share are $3.81 and the stock price is $82.84. What is the company’s...

Merck’s earnings per share are $3.81 and the stock price is $82.84. What is the company’s PE multiple? The industry PE is 17.95 and the S&P PE is 13.95. What does this indicate about the risk of investing in Merck’s shares?

- The estimate for the company’s 2020 EPS is $5.58 and $6.24 for 2021. What are the forecasted stock prices for this year and next year? What investment strategy would you recommend? Why?

- The decision is made to invest in Merck. How would a limit order be used? What price would be set in the limit order if you are willing to take a 10% risk and a 20% risk?

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Answer #1

P/E = Price / EPS = 82.84 / 3.81 = 21.74

The risk is higher because the PE is higher than industry and S&P as well.

Price this year = EPS x P/E = 21.74 x 5.58 = $121.32

Price next year = 21.74 x 6.24 = $135.67

You should buy the stock as with growth in earnings, the stock price will go up as well.

Limit order means that you set a price to buy or sell a particular stock.

10% Limit Order for buy = $82.84 x (1 - 10%) = $74.56

20% Limit Order for buy = 82.84 x (1 - 20%) = $66.27

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