Asked by jayden pineda on May 05, 2024
Verified
An analyst has determined that the intrinsic value of Coca Cola stock is $80 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of Coca Cola in the coming year is
A) $3.64.
B) $4.44.
C) $14.40.
D) $22.50.
Capitalized Earnings Model
A method to value a company by dividing its earnings by the capitalization rate, assuming constant future earnings.
P/E Ratio
Price-to-Earnings Ratio, a valuation metric that compares a company's stock price to its per-share earnings, used to evaluate if a stock is over or undervalued.
EPS
Earnings per share, a company's profit divided by its number of outstanding shares.
- Determine the fundamental worth of stocks through a variety of valuation methods, including constant growth DDM, the capitalization of earnings, and Price/Earnings ratios.
Verified Answer
RW
Rosie WilliamsMay 08, 2024
Final Answer :
A
Explanation :
The capitalized earnings model determines the intrinsic value of a stock by dividing the expected earnings per share (EPS) by the required rate of return minus the growth rate. However, in this question, the P/E ratio is given instead of the required rate of return or growth rate. To find the expected EPS, you can rearrange the formula for the P/E ratio, which is Price per Share / EPS. Given the intrinsic value (Price per Share) is $80 and the P/E ratio is 22, you solve for EPS: $80 / 22 = $3.64.
Learning Objectives
- Determine the fundamental worth of stocks through a variety of valuation methods, including constant growth DDM, the capitalization of earnings, and Price/Earnings ratios.