Question

Suppose you are thinking about buying a share of Quack, Inc. You believe that BVR, Co. is a comparable company in terms of risk and as such can be used to help value Quack, Inc. If the earnings per share for Quack, Inc. is currently $2.00, the earnings per share for BVR is $3.00, and the price-to-earnings ratio for BVR is equal to 17.50, what is the price you would be willing to pay for Quack, Inc?

Answer 1

Answer:

Price per share for Quack Inc willing to pay is $35

Explanation:

Data provided in the question:

Earnings per share for Quack, Inc. = $2.00

Earnings per share for BVR = $3.00

Price-to-earnings ratio for BVR = 17.50

Now,

in the question, since it is believed  that BVR, Co. is a comparable company in terms of risk and as such can be used to help value Quack, Inc

therefore,

the Price-to-earnings ratio for Quack, Inc will be equals to the Price-to-earnings ratio for BVR

Also,

P/E Ratio = Price per share ÷ Earnings per share  

thus,

17.50 = Price per share for Quack Inc ÷ $2.00

or

Price per share for Quack Inc = $35