The Ramaphosa Company is a relatively small, privately owned firm.Last year the company had after-tax income of R15,000, and 10,000 shares were outstanding.The owners were trying to determine the market value of the shares, 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 Ramaphosa's stock.

Question

Quizplus · Accepted Answer

The market value of one share can be estimated by multiplying the earnings per share by the price/earnings ratio of the similar publicly traded firm. The earnings per share for Ramaphosa's company is calculated by dividing the after-tax income (R15,000) by the number of outstanding shares (10,000), which gives an EPS of R1.50. Then, multiplying this EPS by the price/earnings ratio (5.0) of the similar publicly traded firm gives a market value of R7.50 per share for Ramaphosa's company.

The Ramaphosa Company Is a Relatively Small, Privately Owned Firm