Question

In multiple analysis, to calculate a firm's expected stock price by using the P/E ratio, what should you do?

1) Multiply the firm's earnings per share (EPS) by the P/E ratio
2) Divide the firm's earnings per share (EPS) by the P/E ratio
3) Add the firm's earnings per share (EPS) to the P/E ratio
4) Subtract the firm's earnings per share (EPS) from the P/E ratio

Answer 1

To estimate a firm's expected stock price using the P/E ratio, multiply the firm's EPS by the P/E ratio. This reflects what investors are willing to pay for each dollar of earnings.

Step-by-step explanation:

To calculate a firm's expected stock price using the Price-to-Earnings (P/E) ratio, you should multiply the firm's earnings per share (EPS) by the P/E ratio. This method is a common valuation tool that estimates what the market is willing to pay for a stock based on its current earnings.

To calculate a firm's expected stock price using the P/E ratio, you should multiply the firm's earnings per share (EPS) by the P/E ratio.

The P/E ratio is a measure of the price investors are willing to pay for each dollar of the firm's earnings. By multiplying the EPS by the P/E ratio, you can estimate the expected stock price. For example, if a firm has an EPS of $3 and a P/E ratio of 20, the expected stock price would be $60 ($3 x 20).