Question

4. You want to value the stock of a company that is not publicly traded. This company has earnings of $4.25 per share, BV of equity of $9.85 share, and CFs to equity of $1.85 per share. You have the following information on firms that are extremely similar to the firm that you're trying to value: Company А Stock price per share 14.85 65.41 36.09 Earnings per share 2.48 8.14 3.86 BV of equity per share 7.25 34.96 14.23 CFs to equity per share 1.36 6.62 4.28 Come up with three appropriate estimates of the stock price for your firm of interest.

Answer 1

From the given data, we need to calculate P/E, P/BV & P/CF ratios for the individual companies and average for the industry:

Company	P/E	P/BV	P/CF
A	5.98	2.05	10.92
B	8.04	1.87	9.88
C	9.35	2.54	8.43

Now, we calculate the avg P/E, P/BV & P/CF ratios for the industry:

Avg P/E = (5.98 + 8.04+ 9.35)/3 = 7.79

Avg P/BV = (2.05 + 1.87 +2.54)/3 = 2.15

Avg P/CF = (10.92 +9.88 + 8.43)/3 = 9.74

Now, we have the firm of interest's Earnings of $ 4.25 per share.

So, Stock Price =  Avg P/E * Earnings = $ 7.79 *4.25 = $ 33.11 (Ans-1)

Now, we have the firm of interest's BV of $ equity at 9.85 per share.

So, Stock Price =  Avg P/BV * BV = $ 2.15 *9.85 = $ 21.20 (Ans-2)

Also, we have the firm of interest's CF to equity of $ 1.85 per share.

So, Stock Price =  Avg P/CF to equity* CF to equity= $ 9.74 *1.85 = $ 18.03 (Ans-3)