Question

Flex Co. just paid total dividends of $1,075,000 and reported additions to retained earnings of $3,225,000. The company has 715,000 shares of stock outstanding and a benchmark PE of 17.3 times. What stock price would you consider appropriate?a. $52.80
b. $17.60
c. $70.40
d. $63.36
e. $66.88

Answer 1

Given:

Total dividends = $1,075,000

Retained earnings = $3,225,000

Stock outstanding = 715,000 stocks

Benchmark PE = 17.3 times

To find:

Stock price

Solution:

To calculate the stock price, initially we have to calculate the earnings per share,

$\text{Earnings per share} = \frac{\text{(Dividend + addition to retained earnings)}}{\text{Total number of shares}}$

$\Rightarrow\frac{(600000 + 1800000)}{525000}=4.571428571$

Now, to calculate the PE ratio,

$\text{PE ratio} = \frac{\text{Stock price}}{\text{EPS}}\Rightarrow\text{Stock price} = \text{PE ratio}\times\text{EPS}$

$\text{Stock price}=4.571428571\times15.4=\ 70.4$

Therefore, the the stock price would be $70.40 that is, option c.