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BigV90
Oct 11, 2009, 04:10 PM
Hi I am having difficulty with this homework question.. I have some formulas.. but I don't know how to solve this question.can you please help.. thank you

GC company has a book value of $28374976, expected earnings of $2871872 and a cash-flow of $5169369.6. The company also has 1000000 shares outstanding. Knowing the market multiple from other stocks for P/E is 16.7 and the M/B from the broad market is 2 answer the following:
P/e is the price earning ratio =Price per share/Annual earnings per share
M/B=Market to book P/BVPS BVPS=Book value per share M/B=Market Price per share /Book value per share


a) What is the estimated stock price of GC based on P/E multiples?

b) What is the estimated stock price of GC based on M/B multiples?

ArcSine
Oct 12, 2009, 04:37 AM
a) First calculate GC's EPS (earnings per share). You're given total earnings, and number of shares outstanding. (The fact that the number of shares is exactly 1M makes your math real easy :)) Following that, you're given the P/E ratio as being 16.7...

16.7\ =\ \frac{\text{Price}}{\text{EPS}}

... which means that \text{Price} \ =\ 16.7 \ \times \ \text{EPS}

b) Determine GC's book value per share. Again, you've been provided with both the necessary ingredients; namely, total book value, and number of shares outstanding.

Having done that, note that the M/B multiple says that the per-share market price should be twice the book value per share.