Question

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You are asked to value Gamecocks Inc. using the relative valuation method. Gamecocks Inc.'s earnings forecast for next year (EPS (next year)) is $2.44. The valuation and earnings of comparable companies are provided below. What is your estimate for the company's stock price? Round to one decimal place. (Hint: Compute the corresponding valuation multiple of the comparables and take simple average across the three comparable companies. Then apply this average multiple to Gamecocks Inc.) Stock Price EPS (TTM) EPS (next year) EPS growth 5Y 5.1% $18.3 $26.3 $1.04 $1.12 $2.11 $1.22 $1.42 B 6.9% $55.9 $2.80 10.2% Numeric Answer:

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Answer 1

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PE ratio = price per share / EPS

PE ratio of three companies is computed using next year EPS because we are given Gamecocks Inc.'s next year EPS, and hence next year EPS is the appropriate comparable.

PE ratio of A = $18.3 / $1.22 = 15.00

PE ratio of B = $26.3 / $1.42 = 18.52

PE ratio of C = $55.9 / $2.80 = 19.96

Average PE ratio = (15.00 + 18.52 + 19.96) / 3

Average PE ratio = 17.83

PE ratio = price per share / EPS

price per share = PE ratio * EPS

Estimate of Gamecocks Inc.'s stock price = 17.83 * $2.44

Estimate of Gamecocks Inc.'s stock price = $43.50