Question

You are trying to value the stock of B&E Corp. B&E is a privately held company so its shares are not publicly traded. You know, however, that the company will have earning per share of $2.00 at the end of the year. In addition, you know that B&E is similar to several publicly traded firms and you have compiled information on these firms in the table below. Using the average price to earnings ratio (P/E ratio) of these comparable firms, what is the best estimate of B&E's share price? Select one.

Firm	Share Price	EPS1
I	$    33.55	$       2.30
II	$    14.01	$       1.10
III	$    15.77	$       1.20
IV	$    11.98	$       0.75
V	$    11.12	$       0.80

Answer 1

Answer:

Calculation of B&E's Share Price (Best Estimate):

P/E Ratio = Market Price / EPS

Therefore, Market Price = P/E Ratio * EPS

We have given EPS of B&E $2

and for P/E ratio we need to require to use average P/E ratio of 5 given firms.

So, Lets first calculate Average P/E Raio :

P/E Ratio = Market Price / EPS

P/E Ratio of Firm I = $33.55 / 2.30 = 14.59

P/E Ratio of Firm II = $14.01 / 1.10 = 12.74

P/E Ratio of Firm III = $15.77 / 1.20 = 13.14

P/E Ratio of Firm IV = $11.98 / 0.75 = 15.97

P/E Ratio of Firm V = $11.12 / 0.80 = 13.90

Therefore Average P/E Ratio = (14.59+12.74+13.14+15.97+13.90) / 5

= 70.34 / 5

= 14.068 times

Therefore B&E's Share Price (Best Estimate): P/E Ratio * EPS

= 14.068 * $2

= $28.136