Westside Motors has expected earnings after taxes for Year 4 of $122,000 and has 25,000 outstanding shares.The current value of the firm's earnings for the next four years,Years 1 through 4,is $391,600.The comparable PE for the firm is 8.2.What is the estimated value of one share of this stock if the required rate of return is 15 percent?

Question

Quizplus · Accepted Answer

Terminal value_{Year 4} = $122,000 × 8.2 = $1,000,400Current firm value = $391,600 + 1,000,400 = $1,392,000Price per share = $1,392,000/25,000 = $55.68

Westside Motors Has Expected Earnings After Taxes for Year 4