The Charleston Company is a relatively small,privately owned firm.Last year the company had 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,estimate the market value of one share of Charleston's stock.
A) $10.00
B) $7.50
C) $5.00
D) $2.50
E) $1.50

Question

Quizplus · Accepted Answer

Using the price/earnings ratio method, we can estimate the market value of one share of Charleston's stock.

Price/earnings ratio = Market value per share / Earnings per share

Since a similar publicly traded firm had a price/earnings ratio of 5.0, we can use it to estimate the market value per share of Charleston's stock.

5.0 = Market value per share / ($15,000 / 10,000 shares)
Market value per share = 5.0 x ($15,000 / 10,000 shares)
Market value per share = $7.50

Therefore, the best choice is B) $7.50.

The Charleston Company Is a Relatively Small,privately Owned Firm