Question

How do I solve this? Need to show work. Question: A stock analyst is trying to...

How do I solve this? Need to show work.

Question: A stock analyst is trying to calculate a fair value of XYZ company’s common stock by using the following information. What would be the fair value of this company’s common stock? Industry average P/E ratio = 3.45 times and Earnings per share of XYZ company is $5.0.

Answer: $17.25 per share

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Homework Answers

Answer #1

Solution:

We know that Price Earnings ratio or P/E Ratio is calculated as follows:

P / E Ratio = ( Fair value of stock / Earnings per share)

As per the information given in the question we have :

P / E Ratio = 3.45 times

Earnings per share = $ 5.0

Fair value of stock = To find

Applying the above values in the formula we have

3.45 = Fair value of stock / 5

3.45 * 5 = Fair value of stock

Fair value of stock = 3.45 * $ 5

= $ 17.25

Thus the Fair value of stock of XYZ Co. = $ 17.25 per share

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