P/E ratio and Gordon valuation exercises, show your work for full credit!

PE ratio

1. If a firms eps is expected to be $5 next year, and you believe a p/e of 25 is justified, what is the
value of this stock?

The value of the stock is around $80.

2. If the price for the above stock is 200, is it a buy, sell or hold?

This is insanely undervalued, so BUY!!!\

3. If a firm’ss eps is currently $4.00 but is expected to grow by 50% next year, and you believe a
p/e of 25 is justified, what is the value of this stock?
4. The value of the stock is 95
5. If the price for the above stock is now 100, is it a buy, sell or hold?

It’s a hold, its about the same!

6. If a firm’ss eps is currently $2.00 but is expected to grow by 50% next year, and you believe a
p/e of 20 is justified, what is the value of this stock?
7. If the price for the above stock is now 100, is it a buy, sell or hold?

Sell this stock, it’s overvalued.

8. If a firm’ss currently has negative eps but eps is expected to be 1.00 next year, and you believe a
p/e of 20 is justified, what is the value of this stock?
9. 7.00
10. If the price for the above stock is now 12, is it a buy, sell or hold?
11. It’s overvalued, so sell!
12. If your boss believes eps next year will only hit 50 cents rather than a dollar, what is the value of
the stock according to her?
13. It’s worth 6.50.
14. Is the above stock a buy, sell or hold for your boss?

It’s a hold.

Gordon

Value = next year dividends / k – the long term growth rate (after dividends are paid out).

Note D0 is current dividend and D1 is next year’s dividend.

Given the below, use Gordon formula to calculate the value of the stock:

1. D1 = 5, K= .15 (that is, 15%), and G= .05 after dividends are factored out
2. D0 = 5 and dividends are expected to growth by 10% nest year; and K= .15 (that is, 15%), and G=
.05 after dividends are factored out

3. D1 -= 4 and the firm has a beta of 1.5, rm is 9% and rf is 3% (so use capm to calculate k) and te g
is .06