An analyst just received the following information for Mythical Interactions, Inc. A senior equity trader in her group wants to know if he should purchase a large block of the stock.
Based on the assumptions above, which of the following recommendations is CORRECT? The analyst should advise the trader to:
Click on the arrows to vote for the correct answer
A. B. C. D.B
To determine whether the trader should purchase the stock, we need to determine if the stock is overvalued or undervalued. Given the information in this problem, we will use the price/earnings (P/E) ratio and the earnings per share (EPS) to calculate an estimated value.
The P/E ratio = Dividend Payout Ratio / (ke"" g),
EPS = [(Per share Sales Estimate) * (EBITDA%) "" D (per share) "" I (per share)] * (1 - t)
= [($175 * 0.22) - $20 - $12] * (1 "" 0.40) = $3.90
Value of stock = EPS * P/E = 13.725 * $3.90 = approximately$53.50
Conclusion:The trader should purchase a block of the stock. It is undervalued by the difference between the market price and the estimated value, $53.50 -
$45.50, or approximately $8.00.