Stock Price Calculation Using Benchmark P/E Ratio

Question:

The price of a stock is calculated by multiplying the benchmark P/E (price-earnings) ratio with the ______.

– Benchmark price-sales ratio.

– Dividend per share.

– Capital yield ratio.

– Earnings per share.

Answer Description:

To determine the price of a stock, you use the price-earnings (P/E) ratio. Specifically, the price of the stock is calculated by multiplying the benchmark P/E ratio by the earnings per share (EPS).

Here’s how it works:

Price-Earnings (P/E) Ratio: The P/E ratio is a valuation measure used to assess the relative value of a company’s shares. It is calculated as the current share price divided by the earnings per share (EPS). A higher P/E ratio suggests that investors are willing to pay more for each unit of earnings, indicating growth expectations.

Earnings Per Share (EPS): EPS represents the portion of a company’s profit allocated to each outstanding share of common stock. It is calculated as net income divided by the number of outstanding shares.

Calculation of Stock Price: The formula for calculating the stock price is:

Stock Price = Benchmark P/E Ratio x Earning Per Share (EPS)

By multiplying the benchmark P/E ratio by the EPS, you estimate the stock price based on earnings expectations and valuation standards.