Problem: Four companies are in fast expanding sectors. Each has a steady price to earnings ratio (P/E). Each company is about to publicize new products that could boost their earning per share (EPS). In one case a company will make known that the FDA has rejected a proposed new drug. In each case, analysts will be able to immediately project the change in the companys EPS (abbr. Inc. in EPS). Presume the P/E remains constant. Data for these companys includes the increase in EPS is shown below.
Firm Price P/E Cur EPS Inc. in EPS
Tata $72.00 $12.00 $6.00 $0.50
Bare $104.40 $8.70 $12.00 $0.87
Kita $112.00 $14.00 $8.00 $2.00
Plond $52.50 $15.00 $3.50 -$1.00
What should happen to the price in an efficient market? How soon? Are investors that pay the price after adjustment paying a fair price and are they expected to earn a normal return? Please display calculations in Excel.