Question

At year​ end, Tangshan China Company 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, Tangshan is projecting that it will have net income of​ $1.5 million. If the average​ P/E multiple in​ Tangshan's industry is​ 15, what should be the price of​ Tangshan's stock?

Answer 1

Earnings per share

= Net income - Preferred dividend

No of common stocks outstanding

= $1,500,000 - 0

1,000,000 shares

= $1.50 per share

P/E ratio = Market price per share

Earnings per share

15 = Market price per share

$1.50

Market price per share = 15 x $1.50

= $22.50

Step-by-step explanation:

In this question, there is need to calculate earnings per share by dividing net income by number of common stocks outstanding. Thereafter, we will apply P/E ratio formula, where P/E ratio and earnings per share are known. We will make market price per share the subject of the formula.