Question

New Metals has depreciation of $28,300, interest expense of $11,400, EBIT of $62,700, a price-earnings ratio of 8.6, a profit margin of 7.2 percent, a tax rate of 21 percent, and 37,500 shares of stock outstanding. What is the market price per share?

Answer 1

Solution :

Calculation of Earnings per share :

As per the information given in the question

Interest expense = $ 11,400 ; EBIT = $ 62,700, Tax rate = 21 percent ;

No. of shares outstanding = 37,500

The formula for calculating the EPS per share is = Net Income / No. of shares outstanding

= [ ( EBIT - Interest ) * ( 1 - Tax Rate ) ] / No. of shares outstanding

Applying the available information in the formula we have

= [ ( $ 62,700 - $ 11,400 ) * ( 1 - 0.21 ) ] / 37,500

= [ ( $ 51,300 ) * ( 0.79 ) ] / 37,500

= $ 40,527 / 37,500

= $ 1.080720

Thus the Earnings per share = $ 1.080720

Calculation of Market price per share :

The formula for calculating the Price Earnings Ratio is = Market price per share / Earnings per share

As per the Information available we have

Price Earnings Ratio = 8.6 ; Earnings per share = $ 1.080720

Market price per share = To find

Applying the above values in the formula we have

8.6 = Market price per share / $ 1.080720

8.6 * $ 1.080720 =  Market price per share

Market price per share = 8.6 * $ 1.080720

Market price per share = $ 9.294192

Market price per share = $ 9.29 ( when rounded off to two decimal places )

Market price per share = $ 9.3 ( when rounded off to one decimal place )

Thus the market price of the share = $ 9.3