Question

balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Flintstone is projecting that it will have net income of $1.5 million. If the average P/E multiple in Flintstone's industry is 15, what should be the price of Flintstone's stock

Answer 1

$22.5

Step-by-step explanation:

Price earning ratio determines the ratio of price of a share by the earning per share . It measures the times value which a investor pays for each $1 earning of the shares.

Earning per share = Net income / Outstanding number of shares

Earning per share = $1,500,000 / 1,000,000 = $1.5 per share

As we have the PE ratio and Earning per share, we have to calculate the Market price of the stock using following formula

Price Earning Ratio = Market Price of Stock / Earning Per share

15 = Market Price / $1.5

Market Price = 15 x $1.5 = $22.50

Answer 2

The price per share should be $22.5

Step-by-step explanation:

The price earnings multiple or P/E tells us how much price the investors are willing to pay for $1 earnings of the company.

We first need to calculate the earnings per share of the company.

Earnings per share = Net Income / Number of outstanding common shares

Earnings per share = 1500000 / 1000000 = $1.5 per share

Using the P/E for the industry, the price per share of Flintstone should be,

P/E = Price per share / Earnings per share

15 = Price per share / 1.5

15 * 1.5 = Price per share

Price per Share = $22.5