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 | EPS_{1} |

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**

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