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Suppose the industry average P/E ratio for clothing resellers is 12. And suppose the earnings per...

Suppose the industry average P/E ratio for clothing resellers is 12. And suppose the earnings per share for the Gap is $1.35. What is the intrinsic price of Gap's stock?
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Answer #2

Solution:

The formula for calculating the Price Earnings ratio or P/E Ratio is :

P / E Ratio = (Market price or Intrinsic Price / Earnings per share)

As per the information given in the question we have

P / E Ratio = 12 ; Earnings per share = $ 1.35

Applying the above information in the formula we have

12 = Intrinsic Price / $ 1.35

12 * $ 1.35 = Intrinsic Price

Intrinsic Price = 12 * $ 1.35

Intrinsic Price = $ 16.20

Thus the intrinsic price of Gap's stock = $ 16.20

answered by: anonymous
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