# Studying for basic finance exam and stuck finding the stock value

I'm not sure if this is the right place to ask a school related question but any help would be much appreciated! Note that this is not an actual graded assignment but I am studying for an exam with possible similar type problems. I have an answer but I'm not confident with it and I don't have solutions to compare my work.

I am trying to find the value of a certain stock with the given information:

• An annual EPS of \$0.50
• Beta of 2.2
• Expected return of 21%
• Average P/E ratio in similar industry of 7.0

So I'm thinking I can find the stock value by simply multiplying the EPS and the P/E ratio: .5 * 7 = \$3.5

But I'm pretty sure it isn't that simple with all the other information given in the problem. Could someone help me understand what I'm missing here?

*edit One of the answer choices is insufficient information to find stock value. Would it be possible that I am overlooking this?

• What do you mean by "Expected return"? – Klas Lindbäck Jun 13 '18 at 9:17
• 3.5 \$/share would be the correct answer IF the stock was valued on the average. To calculate the value of this stock you would need to use the P/E ratio of this particular stock and not the average. – Klas Lindbäck Jun 13 '18 at 9:19
• I think expected return can be interchangeable with required rate of return but I could be wrong on that. – John Gucuo Jun 13 '18 at 9:40
• Trying to figure out how I would find the actual P/E ratio without the stock price given – John Gucuo Jun 13 '18 at 9:48

## 1 Answer

There is insufficient information given.

Beta is of no help.

EPS would help if we knew the P/E ratio of the company, but we don't.

Expected return is insuficiently specified. Expected return on what? On the stock price if you buy the stock? On capital for the company? Either way it doesn't help in determining stock value.

Average P/E ratio doesn't help. You need the P/E ratio of this particular company.

One could also consider if they mean something different with value than with price. Some argue that they are the same. Others argue that the current stock price can be above or below the value due to market imperfections. Either way, there still isn't enough information to calculate the stock value.

• Thank you for the clarification! I've been staring at this problem for the past 2 and a half hours trying to make sense of the beta and the expected return. – John Gucuo Jun 13 '18 at 10:28