Questions

COMM_V 298 101 102 103 2025W1 Class 9 and 10 Practice Quiz

Multiple dropdown selections

Pratt Inc. manufactures aircraft parts. Pratt has expected earnings per share (EPS) of $7.50 for the next year and just paid a dividend of $3.75. The growth rate expected is 3% in perpetuity, and investors require an 8% return. The share is currently selling for $75 per share. A very good comparable company, Whitney Co. has a P/E ratio of 15. Part A: What is your estimate estimate of Pratt Inc.'s share price, using a comparable firms valuation method? [ Select ] $112.50 $150.00 $7.50 $75.00 $56.25 Part B: What does the share price calculated in Part A tell you about the current value of Pratt Inc.? The share price calculated in Part A is higher than the current value of $75, meaning that Pratt Inc. is currently undervalued , according to the multiples valuation method. Part C: Using a discounted cash flow valuation model instead, what is your best estimate of Pratt's share price? $77.25 , which is [ Select ] lower higher than the current value of $75, meaning that Pratt Inc. is currently [ Select ] overvalued correctly valued undervalued , according to the discounted cash flow valuation method.

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To begin, let's restate the scenario and the answer options for clarity across all parts. Part A presents a comparables-based valuation. The relevant options for the estimate are: $112.50, $150.00, $7.50, $75.00, and $56.25. The setup gives Pratt Inc. with an expected EPS of $7.50 next year, a growth rate of 3% in perpetuity, and investors require an 8% return. A very good comparable, Whitney Co., trades at a P/E ratio of 15. The question asks for the comparable firms valuation of Pratt’s share price. Analysis of Part A options: - $112.50: This is the product of Pratt’s expected EPS ($7.50) times Whitney’s P/E (15), i.e., 7.50 × 15 = 112.50. This aligns with the typical use of a price-to-earnings multip......Login to view full explanation

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