A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm's shares based on the price-earnings (PE) method is

Question

Quizplus · Accepted Answer

Using the P/E ratio, we can calculate the valuation of the firm's shares by multiplying the expected earnings per share by the mean P/E ratio in the industry.

Valuation = Earnings per share x P/E ratio 
Valuation = $2.22 x 15 
Valuation = $33.30

Therefore, the valuation of the firm's shares based on the P/E method is $33.30.

A Firm Is Expected to Generate Earnings of $2