Zorba's is a small chain of restaurants whose stock is not publicly traded. The average P/E ratio for similar restaurant chains is 16.5; the P/E ratio for the S&P 500 Index is 15.2. This year's earnings were $1.21 per share and next year's earnings are forecasted at $1.46 per share. A reasonable price for a share of Zorba's stock is
A) $24.
B) $20.
C) $18.
D) $16.

Question

Quizplus · Accepted Answer

To calculate the reasonable price of Zorba's stock, we can use the formula:
Price per share = Earnings per share * P/E ratio

This year's earnings per share (EPS) for Zorba's is $1.21. Next year's forecasted EPS is $1.46. We will use the average P/E ratio for similar restaurant chains, which is 16.5.

Using the formula, we can find the reasonable price per share:
Price per share = $1.46 * 16.5 = $24.09 (rounded to the nearest cent)

Therefore, the best choice is A) $24.

Zorba's Is a Small Chain of Restaurants Whose Stock Is