Question

Flex Co. just paid total dividends of $1,100,000 and reported additions to retained earnings of $3,300,000. The company has 725,000 shares of stock outstanding and a benchmark PE of 17.4 times. What stock price would you consider appropriate

Answer 1

$105.60

Step-by-step explanation:

Given: Total dividend paid= $1100000.

Retained earning= $3300000.

Number of outstanding shares= 725000.

PE ratio= 17.4 times.

First finding earning per share.

Formula;
`EPS= ((paid\ dividend+ additional\ retained\ earning))/(number\ of\ outstanding\ shares)`

⇒
`EPS= ((1100000+3300000))/(725000)`

⇒
`EPS= (4400000)/(725000)`

∴
`EPS= \$ 6.0689 \approx \$ 6.07`

Hence, earning per share (EPS)= $6.07.

Now, finding the appropriate stock price.

Price of stock=
`EPS* PE`

⇒ Price of stock=
`\$ 6.07* 17.4`

∴ Price of stock=
`\$ 105.60`

Hence, $105.60 would be the appropriate price of stock.