Question

At year​ end, Economy Automotive​ Company's balance sheet showed total assets of​ $60 million, total liabilities​ (including preferred​ stock) of​ $45 million, and​ 1,000,000 shares of common stock outstanding. Next​ year, Economy Automotive is projecting that it will have net income of​ $1.5 million. If the average​ P/E multiple in the industry is​ 17, what should be the price of Economy​ Automotive's stock?(A) $15.00 (B) $7.50 (C) $52.50 (D) $75.00

Answer 1

Answer:

$25.50

Explanation:

Price to earning ratio is calculated by dividing market price per share with the earnings per share. This is investor ratio which determines how much an investor is willing to pay per dollar. This ratio is used by investors to identify whether the company is undervalued or overvalued.

To calculate stock price of Economy Automotive is calculated by multiplying net income with the P/E ratio.

Stock price = $1.5 million * 17 = $25.50