Next Tech Inc. is an information technology company that had $1.94 in earnings per share (EPS) this year. The average price-to-earnings (P/E) ratio of comparable information technology firms is 24.3. What should Next Tech Inc.'s share price be?

Answer in dollars and round to the nearest cent. (Do not include the $ sign.)

Question

Next Tech Inc. is an information technology company that had $1.94 in earnings per share (EPS) this year.  The average price-to-earnings (P/E) ratio of comparable information technology firms is 24.3.  What should Next Tech Inc.'s share price be?

Answer in dollars and round to the nearest cent.  (Do not include the $ sign.)

BlackTom AI · Accepted Answer

Share price equals EPS multiplied by the P/E ratio, so use Price = EPS × P/E.

1) Relevant concepts:
- Earnings per share (EPS) measures a company’s net income allocated to each share.
- The price-to-earnings (P/E) ratio indicates how much investors are willing to pay per dollar of earnings. Multiplying EPS by an appropriate P/E gives an estimated share price.
- Using the average P/E of comparable firms provides a market-based valuation benchmark.

2) Step-by-step reasoning and calculation:
- Given EPS = 1.94 and comparable average P/E = 24.3.
- Compute Price = 1.94 × 24.3.
- Break the multiplication into parts for clarity:
  - 1.94 × 24 = 1.94 × (20 + 4) = (1.94 × 20) + (1.94 × 4) = 38.8 + 7.76 = 46.56.
  - 1.94 × 0.3 = 0.582.
- Add the parts: 46.56 + 0.582 = 47.142.

3) Rounding and final value:
- Round 47.142 to the nearest cent = 47.14 (since the thousandths digit 2 < 5).

4) Why this is correct:
- The P/E approach directly converts earnings into a price expectation: a P/E of 24.3 means investors pay $24.30 for each $1.00 of EPS. Multiplying that ratio by Next Tech’s EPS yields the market-implied per-share price.

5) Other options:
- Not applicable because this is a short-answer calculation rather than multiple-choice. Any alternative valuation methods (discounted cash flow, book-value multiples) would use different inputs; given the problem specifies using the average P/E, the multiplication above is the appropriate and correct method.

Conclusion: The calculated share price, rounded to the nearest cent, is 47.14, which matches the provided answer.

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