STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1’s stock is trading for $50, and comparable firm 2’s stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.)

$36

Explanation:

Computation for comparable firm 1

Price earning = Share price / Earning per share

= $50 / 5 = $10

Computation for comparable firm 2

Price earning = Share price / Earning per share

= $28 / 2 = $14

Average price earning = (Price earning of firm 1 + Price earning of firm 2) / 2

= ($10 + $14) / 2

= $12

Computation of stock price For STU

Stock price = Average price earning × Earning per share of STU

STU = 12 × ($3 million / $1 million) = $36

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answer; tech (a) is correct;