Question

The Perfect Rose Co. has earnings of $3.18 per share. The benchmark PE for the company is 18. a. What stock price would you consider appropriate? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What if the benchmark PE were 21? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. $3.18 x 18 = $57.24

b. $3.18 x 21 = $66.78

Explanation:

PE ratio is Price-to-earning ratio which is a quick and widely-used ratio to determine a compay stock's price.

PE ratio of a company stock is determined as the current market price of a company stock divided by earning per stock of a company which is total profit of a company divided by total number of outstanding common share.

To determine the valued stock is undervalued or overvalued, usually there is a benchmark PE which is the PE of its comparison company or of the index ( e.g: company within the same industry, Dow Jones index). If the PE of a valued stock is higher than its comparision meaning the valued stock is overvalued and vice versa.

The underlying concept is that a valued stock should be of the same value as the comparison stock as we compare the profit per common share the two stocks bring about.

PE ration is a quick, yet too simple to be applied alone in stock valuation as the approach ignore many material factors in stock valuation such as cashflow of the firm, the inherit of the valued company.