You are considering purchasing Babcock Office Supply. You estimate that the company's earnings next year will be $67,400. You have found three similar companies whose stock is publicly traded. Their P/E ratios are 6.8, 7.4, and 7.1. Using the market approach, you estimate Babcock Office Supply to be worth:

Question

Quizplus · Accepted Answer

The estimated value of Babcock Office Supply is calculated by taking the average P/E ratio of the similar companies and multiplying it by the estimated earnings. The average P/E ratio is (6.8 + 7.4 + 7.1) / 3 = 7.1. Therefore, the estimated value is 7.1 * $67,400 = $478,540.

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