At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average P/E multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?

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Business

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18 September, 15:30

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average P/E multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?

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Answers (1)

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Tessa Warner · Answer 1

Earnings per share

= Net income - Preferred dividend

No of common stocks outstanding

= $1,500,000 - 0

1,000,000 shares

= $1.50 per share

P/E ratio = Market price per share

Earnings per share

15 = Market price per share

$1.50

Market price per share = 15 x $1.50

= $22.50

Explanation:

In this question, there is need to calculate earnings per share by dividing net income by number of common stocks outstanding. Thereafter, we will apply P/E ratio formula, where P/E ratio and earnings per share are known. We will make market price per share the subject of the formula.