Response to the following problem:
You're thinking about buying some shares in Affiliated Computers and want to use the P/E approach to value the shares. You've estimated that next year's earnings should come in at about $4.00 a share. In addition, although the share normally trades at a relative P/E ratio of 1.15 times the market, you believe that the relative P/E ratio will rise to 1.25, whereas the market P/E ratio should be around 18.5 times earnings. Given this information, what is the maximum price you should be willing to pay for this share?
If you buy this share today at $87.50, what rate of return will you earn over the next 12 months if the price of the share rises to $110.00 by the end of the year?
(Assume that the share doesn't pay any dividends.)