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  • 1.  CMA Pt. 2 Q63 | Price/earnings

    Posted 09-05-2020 11:38 AM
    Hello everyone,

    Would you be so kind to let me know which answer you think is the correct one?

    The common stock of a beverage company has a current market price of $34. The beverage
    company is estimated to earn $2 per share in the next year. The average price/earnings ratio of
    companies in the beverage industry is 15. Using the price/earnings ratio as the comparable
    valuation method, the beverage company's stock is

    a. $2 undervalued.
    b. $2 overvalued.
    c. $4 undervalued.
    d. $4 overvalued

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    Diogo Pimenta

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  • 2.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-06-2020 02:42 AM
    Hi Diogo,

    The PE ratio formula is : Market Price/ Earning Per Share

    This PE is a leading PE ratio problem as it is forward looking with an increase of $2 in Earning Per Share in the next period

    Market PE is 15
    The PE of the Beverage Co is 34 with EPS of 2 that we arrive at a  PE of 17 ($34/$2). Hence the company's stock is overvalued by $2 from the industry average PE of 15

    Happy to learn more if the above explanation happens to be incorrect.

    Kind regards
    Srirama

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    Srirama S Nagarajan
    Regional Manager - Finance
    Maersk
    Chennai, India
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    Original Message


  • 3.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-06-2020 07:55 AM
    @Srirama Nagarajan I solved this question the exact same way as you did. However, CMA Exam Support Package mentions d. as the correct answer which got me wondering,

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    Diogo Pimenta
    Analyst
    Barreiro
    Portugal
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    Original Message


  • 4.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-06-2020 07:56 AM
    @Wael Elsohaily care to explain how you got to that conclusion? ​

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    Diogo Pimenta
    Analyst
    Barreiro
    Portugal
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    Original Message


  • 5.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-06-2020 08:08 AM
    https://www.investopedia.com/terms/p/price-earningsratio.asp

    if the PE ratio is 15 and the company PE is 17 then the stock price should decrease from 34 to 30 so it is overvalued by 4$ not 2$

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    Wael Elsohaily
    Director/Manager
    Cairo
    Egypt
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    Original Message


  • 6.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-07-2020 02:08 AM
    Hi Diogo,

    if we focus on what the question is asking about and notice the currency symbol $ on the choices, we will get the correct answer.
    The beverage company's stock price should be 15×2=30 at the average level. Therefore $4 overvalued.

     


    ​

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    Regards,
    Christine Ye
    Manager
    China
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    Original Message


  • 7.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-07-2020 03:47 AM
    Hi,

    For this we need to find out Avg Stock price of Beverage Industry. We can do it by Avg P/E (Given) * EPS (Taken $2 as its going to be for company A's Eps ) (15 * 2) = 30
    Which makes market price overstated by $4



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    Mushtaq Ahmed
    Controller
    Jeddah
    Saudi Arabia
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    Original Message


  • 8.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-06-2020 02:56 AM
    i think the answer is D, 4$ overvalued

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    Wael Elsohaily
    Director/Manager
    Cairo
    Egypt
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    Original Message


  • 9.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-06-2020 03:58 AM
    1. 2 Undervalued. P/E ratio is 17

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    Badar Ghafoor
    Accountant
    Dubai
    United Arab Emirates
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    Original Message


  • 10.  RE: CMA Pt. 2 Q63 | Price/earnings

    Posted 09-07-2020 11:42 AM
    The question requires you to understand and calculate the company's P/E ratio which is Price/EPS. The information tells us the stock price is $34 per share and the EPS is $2.00

    Therefore, the PE ratio for this company is $34/$2 or 17. C

    Now, compare that to the industry average which is 15 and you conclude that 17 is greater than 15 by 2. The answer should be overvalued by two.

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    Peter Berardi
    Academic
    Bay Path University
    Longmeadow MA
    United States
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    Original Message