Other than dividend growth model, we can employ Market Multiple Analysis method for stock valuation

Finance Oct 19, 2020

Other than dividend growth model, we can employ Market Multiple Analysis method for stock valuation. We suppose a firm's estimated earnings per share is $3. The average price to earnings (P/E) ratio for similiarly traded firms is 10. What's the firm's expected stock price?

$30

$13

$60

$120

Expert Solution

Computation of Firm's Expected Stock Price:

Price to Earnings (P/E) Ratio = Stock Price/Earning per Share

10 = Stock Price / $3

Stock Price = 10*$3

Stock Price = $30

Firm's Expected Stock Price is $30. So, the correct option is 1st "$30".

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