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Tall Tree Timber has annual net income of $213,640 and 72,000 shares of stock outstanding. Big...

Tall Tree Timber has annual net income of $213,640 and 72,000 shares of stock outstanding. Big Trees is a similar firm with similar growth opportunities that has 75,000 shares of stock outstanding with a market price of $31.80 a share and earnings per share of $1.48. What is the estimated value of Tall Tree Timber?

Expert Solution

Sol:

Net income of Tall Tree Timber = $213,640

Tall Tree Timber outstanding stock = 72000

Big Trees outstanding stock = 75000

Big Trees Market price = $31.80 per share

Big Trees Earnings per share (EPS) = $1.48

To determine estimated value of Tall Tree Timber, first we have to find the EPS of Tall Tree Timber and then share price.

Tall Tree Timber EPS = Net income / outstanding stock

Tall Tree Timber EPS = $213,640 / 72000 = $2.9672

Now Big Trees is a similar firm with similar growth opportunities to Tall Tree Timber:

Share price of Tall Tree Timber = (Tall Tree Timber EPS x Big Trees Market price) / Big Trees Earnings per share

Share price of Tall Tree Timber = ($2.9672 x $31.80) / $1.48

Share price of Tall Tree Timber = 94.36 / $1.48 = 63.76

Estimated value of Tall Tree Timber = Tall Tree Timber outstanding stock x Share price of Tall Tree Timber

Estimated value of Tall Tree Timber = 72000 x $63.76 = $4,590,373

Therefore estimated value of Tall Tree Timber will be $4,590,373

jeff jeffy answered 1 year ago

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