Question

Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?

Short answer

The price to the public should be $110.67.

Step-by-step solution

Computation of earnings per share

$$\begin{gathered} Earningspershare=\frac{Earnings}{Outs\tan dingstock} \\ =\frac{\$25,000,000}{7,000,000} \\ =\$3.57 \end{gathered}$$

Computation of price to the public

$$\begin{gathered} Stockprice=\raisebox{1ex}{$P$}\!\left/ \!\raisebox{-1ex}{$E$}\right.ratio\times EPS \\ =31\times \$3.57 \\ =\$110.67 \end{gathered}$$

Hence, the price offered to the public should be $110.67