Questions

COMM_V 298 201-207 2024W2 Class 9: Valuation of Stocks 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 ] $56.25 $112.50 $75.00 $7.50 $150.00 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 [ Select ] undervalued correctly valued overvalued , 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? [ Select ] $46.88 $56.25 $75.00 $125.00 $77.25 , which is higher than the current value of $75, meaning that Pratt Inc. is currently [ Select ] correctly valued undervalued overvalued , according to the discounted cash flow valuation method.

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We start by restating the scenario and breaking down the three parts one by one to explore each option in depth. Part A: What is Pratt Inc.'s share price using a comparable firms valuation method? - The comparable method given uses a P/E multiple from Whitney Co. to value Pratt. The key idea is to apply the same multiple to Pratt’s earnings per share (EPS). - If Whitney’s P/E is 15, then the implied Pratt price would be 15 times Pratt’s expected EPS for next year. Pratt’s expected EPS is $7.50, so the calculation is 15 × 7.50 = $112.50. - Examining the answer options for Part A: $56.25 would correspond to a P/E of 7.5, which is inconsistent with the given comparable mul......Login to view full explanation

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