The Perfect Rose Co. has earnings of $2.00 per share. The benchmark PE for the company is 13.

The Perfect Rose Co. has earnings of $2.00 per share. The benchmark PE for the company is 13.

 
a. What stock price would you consider appropriate?

b. What if the benchmark PE were 16?

Explanation

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Using the equation to calculate the price of a share of stock with the PE ratio:

P = Benchmark PE ratio × EPS

So, with a PE ratio of 13, we find:

P = 13($2.00)

P = $26.00

And with a PE ratio of 16, we find:

P = 16($2.00)

P = $32.00