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The current market value of a firm’s share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million.  Investors are willing to pay a value equivalent to 20 times of the firm’s earnings. Based on the price-earnings multiple valuation model, are the firm’s shares fairly priced? Should an investor buy the share? Explain why.

The current market value of a firm’s share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million.  Investors are willing to pay a value equivalent to 20 times of the firm’s earnings. Based on the price-earnings multiple valuation model, are the firm’s shares fairly priced? Should an investor buy the share? Explain why.

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation
Section: Chapter Questions
Problem 9MC
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The current market value of a firm’s share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million.  Investors are willing to pay a value equivalent to 20 times of the firm’s earnings. Based on the price-earnings multiple valuation model, are the firm’s shares fairly priced? Should an investor buy the share? Explain why.

 

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