The current market value of a firm’s share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million.  Investors are willing to pay a value equivalent to 20 times of the firm’s earnings. Based on the price-earnings multiple valuation model, are the firm’s shares fairly priced? Should an investor buy the share? Explain why.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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The current market value of a firm’s share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million.  Investors are willing to pay a value equivalent to 20 times of the firm’s earnings. Based on the price-earnings multiple valuation model, are the firm’s shares fairly priced? Should an investor buy the share? Explain why.

 

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