Question

The charleston company is a relatively small, privately owned firm. last year the company had an after-tax income of $15,000 and 10,000 shares were outstanding. the owners were trying to determine the market value for the stock prior to taking the company public. a similar firm, which is publicly traded, had a price/earnings ratio of 5.0. using only the information given, the market value of one share of charleston's stock is estimated as:?

Answer 1

To answer this question, let us first define the variables:

Earnings: 15, 000

Shares: 10, 000

P/E Ratio: 5.0

where P stands for Price and E is Earnings per Share

Calculating Earnings per Share:

E: 15, 000/10, 000 = 1.50

Using the P/E ratio, we can get the market value or the price of one stock:

P/1.50 = 5.0

P = 7.50

Therefore market price is 7.50 per share.