Use the follwing infmontonswer Questions 5 and 6: On January 1,2012, the stock o

Question

Use the follwing infmontonswer Questions 5 and 6: On January 1,2012, the stock of Jupiter Inc is trading at $21.50. Sara is analyzing the company's stock and decides to normalize the company's earnings as part of her analysis. She gathers the following information regarding the company's earnings per share (EPS), book value per share (BVPS), and return on equity (ROE) from 2006 to 2011. Measure 2006 2007 2008 2009 2010 2011 EPS (S) 0.58 0.67 0.75 0.83 1.02 1.10 BVPS (S) 2.98 3.25 4.02 4.70 5.155.59 ROE(%) 8.20 9.58 10.85 14.20 21.45 27.20 Question: Using normalized EPS based on historical average EPS, the P/E ratio is closest to. Select one: O a. 19.54 Ob. 28.54 C. 26.06

Explanation / Answer

Answer : c. 26.06

P/E Ratio = Market price per share / Earning per share

Market price per share = $21.50

Earning per share = historical average EPS

= ( $0.58 + $0.67 + $0.75 + $0.83 + $1.02 + $1.10 ) / 6

= $0.825

Hence,

P/E Ratio = $21.50 / $0.825

= $26.06

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