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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Estimating Exxon Mobil Corporation's Intrinsic Stock Value

Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

In this chapter, we described the various factors that influence stock prices and the approaches that analysts use to estimate a stock’s intrinsic value. By comparing these intrinsic value estimates to the current price, an investor can assess whether it makes sense to buy or sell a particular stock. Stocks trading at a price far below their estimated intrinsic values may be good candidates for purchase, whereas stocks trading at prices far in excess of their intrinsic value may be good stocks to avoid or sell Although estimating a stock's intrinsic value is a complex exercise that requires reliable data and good judgment, we can use the Internet to find financial data in order to arrive at a quick "back-of-the- envelope" calculation of intrinsic value.

4. To put XOM's P/E ratio in perspective, it is useful to see how this ratio has varied over time. (If you go to Morningstar and click on the valuation tab, you should see the 10-year summary of its P/E ratio. In addition, it shows a 10-year summary for the S&P 500 P/E ratio as well as Exxon Mobil's 5-year average.) Is XOM’s current P/E ratio well above or well below its 5-year average? Explain why the current P/E deviates from its historical trend. On the basis of this information, does XOM’s current P/E suggest that the stock is undervalued or overvalued? Explain.

Summary Introduction

To explain: Whether the P/E ratio of the company is well above or well below its latest 5-year average, the reason of P/E ratio of the given company deviates from its historical trend, and whether the stock prices of the given company is undervalued or overvalued on the basis of its P/E ratio.

Introduction:

Profit Earning Ratio (P/E Ratio): It refers to the ratio between the price of a share of the company and the earnings on that share, which is earning per share of the company. In other words, it can be defined as the ratio between the price per share of the company and its earnings per share.

Explanation
  • Since, the P/E ratio of the company from the past few months is in the decreasing trend that it got decreased to 16.03 in past 3 months where the 5-year average is 20.69, so, it is well below its latest 5-year average.
  • Since, the P/E ratio is made up of only two factors that is price per share and earnings per share, so, change in the any of these two fa...

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