Question

Flex Co. just paid total dividends of $525,000 and reported additions to retained earnings of $1,575,000. The company has 495,000 shares of stock outstanding and a benchmark PE of 15.1 times. What stock price would you consider appropriate?

a.$52.80
b.$17.60
c.$70.40
d.$63.36
e.$66.88

Answer 1

To determine the appropriate stock price, we calculate the earnings per share (EPS) and multiply it by the benchmark price-to-earnings (PE) ratio. None of the given options are considered appropriate.

Step-by-step explanation:

To determine the stock price, we first need to calculate the earnings per share (EPS).

The total additions to retained earnings represent the net income of the company, which is divided by the number of shares outstanding.

In this case, the net income is $1,575,000 and the number of shares is 495,000, so the EPS is $1,575,000 / 495,000 = $3.18.

Next, we multiply the EPS by the benchmark price-to-earnings (PE) ratio of 15.1.

This gives us a stock price estimate of $3.18 x 15.1 = $47.92.

Therefore, none of the given options are considered appropriate for the stock price.

The closest option is $52.80, but it is still higher than the estimated price of $47.92.