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?

Answer 1

Answer:

The appropriate stock price is $103.97

Explanation:

Given Dividends $1 075 000 Retained Earnings $3 225 000, Shares 715 000

PE ratio 17.3,   SP ?

The PE ratio is a measure of stock price relative to earnings

PE = SP/EPS

So we need to calculate earnings per share in order to get stock price

EPS = Earnings /number of shares

Retained earnings = Net Income - dividends so to get net income we add dividends to retained earnings (Earnings and net income are the same thing)

=$4 300 000

EPS = 4300000/715000

        =$6.01

plug in the values in PE ratio formula

17.3 = SP/ 6.01

SP = 17.3*6.01

SP = $103.97