Question

Flex Co. just paid total dividends of $1,100,000 and reported additions to retained earnings of $3,300,000. The company has 725,000 shares of stock outstanding and a benchmark PE of 17.4 times. What stock price would you consider appropriate

Answer 1

Answer:

$105.60

Explanation:

Given: Total dividend paid= $1100000.

           Retained earning= $3300000.

           Number of outstanding shares= 725000.

           PE ratio= 17.4 times.

First finding earning per share.

Formula; $EPS= \frac{(paid\ dividend+ additional\ retained\ earning)}{number\ of\ outstanding\ shares}$

⇒ $EPS= \frac{(1100000+3300000)}{725000}$

⇒ $EPS= \frac{4400000}{725000}$

∴ $EPS= \ 6.0689 \approx \ 6.07$

Hence, earning per share (EPS)= $6.07.

Now, finding the appropriate stock price.

Price of stock= $EPS\times PE$

⇒ Price of stock= $\ 6.07\times 17.4$

∴ Price of stock= $\ 105.60$

Hence, $105.60 would be the appropriate price of stock.