Question

At year end, Tangshan China Company 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, Tangshan is projecting that it will have net income of $1.5 million. If the average PE multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?

(A) $15.00
(B) $22.50
(C) $52.50
(D) $75.00

Answer 1

The correct answer is $22.5

Step-by-step explanation:

According to the scenario, computation of the given data are as follows:

We can calculate the price of stock by using following formula:

Price of stock = (Net Income ÷ No of Shares) × PE Ratio

By putting the value in the formula, we get

Price of stock = ( $1,500,000 ÷ $1,000,000) × 15

= $1.5 × 15

= $22.5