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use the technique of stock valuation by multiples to fine the approximate share price of a...

use the technique of stock valuation by multiples to fine the approximate share price of a stock that has a current earnings of $3.96 per share given that similar stocks in its industry have an average current price to earnings ratio of 20
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Answer #1

P/E ratio shows that how much times more investor is willing to pay for 1$ earning of the company. P/E ratio is calculated by dividing Market price per share by Earning per share

PE ratiio = MPS/EPS

This ratio is used to compare prices of shares of companies in similar industries like pepsi and co cola. Lets say if company A has PE of 20 and company B has PE of 15, company B is said to be undervalued

Here EPS of company is given as $3.96 and PE ratio of similar stock is given as 20, we can find Price of share as follows

Price of share = EPS * PE ratio of similar stock

=3.96$*20

=79.2$

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