Asked by Maryam Ahsan on Jun 06, 2024
Verified
An analyst has determined that the intrinsic value of VM CORP stock is $20 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of VM CORP in the coming year is
A) $3.63.
B) $4.44.
C) $0.80.
D) $22.50.
Capitalized Earnings Model
A valuation method in which earnings are considered in perpetuity, with a capitalization rate determining the present value of those earnings.
P/E Ratio
Price-to-Earnings Ratio, a valuation metric calculated by dividing the market price per share by its earnings per share, indicating how much investors are willing to pay per dollar of earnings.
EPS
Earnings Per Share, a key financial metric indicating the profitability of a company, calculated as the company's profit divided by the outstanding shares of its common stock.
- Assess the intrinsic valuations of stocks through several methods like constant growth DDM, capitalized earnings approach, and Price/Earnings ratios.
Verified Answer
KY
Kaikai YeungJun 12, 2024
Final Answer :
C
Explanation :
The capitalized earnings model calculates intrinsic value as EPS multiplied by the P/E ratio. Given an intrinsic value of $20 and a P/E ratio of 25, the expected EPS is $20 / 25 = $0.80.
Learning Objectives
- Assess the intrinsic valuations of stocks through several methods like constant growth DDM, capitalized earnings approach, and Price/Earnings ratios.