An analyst has determined that the intrinsic value of IBM stock is $80 per share using the capitalized earnings model.If the typical P/E ratio in the computer industry is 22,then it would be reasonable to assume the expected EPS of IBM in the coming year is ______.
A)$3.64
B)$4.44
C)$14.40
D)$22.50
E)none of the above

Question

Quizplus · Accepted Answer

The intrinsic value of a stock using the capitalized earnings model is calculated as the expected EPS divided by the capitalization rate. The capitalization rate is typically the P/E ratio. Therefore, the expected EPS can be calculated as the intrinsic value multiplied by the capitalization rate. In this case, the intrinsic value is $80 and the P/E ratio is 22, so the expected EPS is $80 * 22 = $1760.

An Analyst Has Determined That the Intrinsic Value of IBM