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

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

ayokenny2001 ayokenny2001 · Answer 2 · 2021-12-09T10:28:50+01:00

The expected market price per share of common stock for next year is

$1.12 per share

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.

So, we start with the computation of the below;

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

Hence,

Expected market per share

= Total value / No of shares

= $11,199.76 /10,000

= $1.12 per share

The expected market price per share of common stock for next year is $1.12 per share.

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