Question

Flex company just paid total dividends of $675,000 and reported additions to retained earnings of $2,025,000. The company has 555,000 shares of stock outstanding and a benchmark PE of 15.7 times. What stock price would you consider appropriate?

a) $48.65
b) $58.91
c) $37.28
d) $45.32

Answer 1

To determine the stock price for Flex Company, calculate the earnings per share (EPS) by dividing additions to retained earnings by the number of shares outstanding. Then, multiply the EPS by the benchmark price-earnings (PE) ratio. Correct option is b) $58.91.

Step-by-step explanation:

To determine the stock price for Flex Company, we need to calculate the earnings per share (EPS) and then multiply it by the benchmark price-earnings (PE) ratio. First, we calculate the EPS by dividing the additions to retained earnings ($2,025,000) by the number of shares outstanding (555,000): $2,025,000 / 555,000 = $3.65. Next, we multiply the EPS by the PE ratio (15.7) to get the stock price: $3.65 x 15.7 = $57.37. Therefore, the appropriate stock price for Flex Company would be approximately $57.37, which is closest to option (b) $58.91.