Question

The current annual sales of Flower Bud, Inc. are $178,000. Sales are expected to increase by 4% next year. The company has a net profit margin of 5% which is expected to remain constant for the next couple of years. There are 10,000 shares of common stock outstanding. The market multiple is 16.4 and the relative P/E of the firm is 1.21. What is the expected market price per share of common stock for next year

Answer 1

Answer:

=  $1.12  per share

Explanation:

The price earnings (P/E ) can be used to determine the value of a stock , The relates the price of a stock to its earning. A stock with a higer P/R indicates a high potent for growth. It gives an idea of much investors are willing to pay for earnings of the company

Price of stock = EPS × comparative  P/E ratio

The appropriate comparative price earnings ratio in the question would be the relative P/E ratio of similar firm. This is so because that gives a better and more reliable comparison as they are in the same industry

Revenue = 178,000 × 104% =  $185,120.00

Earnings =   5% × $ 185,120.00  = $9,256

Total value of shares = Earnings × 1.21

=$9,256× 1.21

= 11,199.76

Expected market per share =  Total value / No of shares

                                  =  11,199.76 /10,000

                                  =  $1.12  per share