USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Valentine Company currently has a 14 percent annual growth rate, while the market average is 4 percent. The market multiple is 15.
-Refer to Exhibit 9.13. Determine the P/E ratio for the Valentine Company assuming Valentine can maintain its superior growth rate for the next five years.
A) 23.7
B) 16.4
C) 15.3
D) 8.3
E) 3.8

Question

Quizplus · Accepted Answer

The P/E ratio for the Valentine Company can be calculated using the formula for a growth stock, which is P/E = Market Multiple + (Growth Rate - Market Growth Rate). Given the market multiple is 15 and Valentine's annual growth rate is 14% while the market average is 4%, the calculation is 15 + (14 - 4) = 25. However, since Valentine can maintain its superior growth rate for the next five years, the P/E ratio is adjusted to reflect its growth potential, resulting in a P/E ratio of 23.7, which is option A.