Question

Company A shares are currently trading at $50 per share. A survey of Wall Street analysts reveals that EPS expectations for Company A for the full year 2014 are $2.50 per share. Company A has 300 million diluted shares outstanding. Company A's major competitors are trading at an average share price / 2014 Expected EPS of 23.0x. Using the comparable company analysis valuation method, Company A shares are:

Answer 1

B. $7.50 per share undervalued

Step-by-step explanation:

Note: Options to the question is attached as picture below

Company A's

Average share price / Expected EPS = $50/$2.50

Average share price / Expected EPS = 20.0x

Competitors average share price/Expected EPS = 23.0x

So, by this the Company A's shares are undervalued since the average share price is lower than expected and the average EPS is higher than expected.

Undervaluation amount = (23-20)*2.50

Undervaluation amount = $7.50