Question

In: Finance

PepsiCo (PEP) has a stock price of $72.00 and EPS of $3.80. Its competitor and close...

  1. PepsiCo (PEP) has a stock price of $72.00 and EPS of $3.80. Its competitor and close comparable firm, the Coca-Cola Company (KO), has EPS of $1.90. Estimate the value of a share of Coca-Cola stock using only this data.

    a.

    $144.00
    b.

    $136.80
    c.

    $36.00
    d.

    $9.11

Solutions

Expert Solution

The correct answer is c. $36.00

To find the value of a share of Coca-Cola we will use PE ratio

PE ratio = Price of Share / Earnings per share (EPS)

As PepsiCo is a close comparable firm the PE ratio will be similar to Coca- Cola

Price of Share = $72.00

EPS = $3.80

PE ratio = $72.00 / $3.80

= 18.94737

Therefore value of share of Coca- Cola using PE ratio (Note - EPS of Coca- Cola = $1.90)

$18.94737 = Price of Share / $1.90

Price of Share = 18.94737 * $1.90

= $36.00

jeff jeffy answered 2 years ago
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