Question

Suppose Microsoft, Inc., reports earnings per share of around $0.75. If Microsoft is in an industry with a P/E ratio ranging from 30 to 40, what is a reasonable price range for Microsoft?

Answer 1

A reasonable price range for Microsoft's stock, with an EPS of $0.75 and an industry P/E ratio between 30 to 40, would be between $22.50 and $30.00 per share.

Step-by-step explanation:

If Microsoft, Inc. reports earnings per share (EPS) of around $0.75 and the industry average Price/Earnings (P/E) ratio ranges from 30 to 40, we can estimate the reasonable price range for Microsoft's stock. To calculate this, we multiply EPS by the P/E ratio. The P/E ratio gives us an idea of what the market is willing to pay today for a share of a company's earnings.

Using the lower end of the industry P/E ratio:

• $0.75 EPS × 30 P/E ratio = $22.50

Using the higher end of the industry P/E ratio:

• $0.75 EPS × 40 P/E ratio = $30.00

Therefore, a reasonable price range for Microsoft stock, given the industry P/E ratio, would be between $22.50 and $30.00 per share.