Blake works for Woolworths Limited (WOW) and owns 5,000 Woolworths shares that he
received in lieu of a bonus five years ago. In its recent results, Woolworths reported an
NPAT figure of $1.294 billion. It has 1.207 billion shares on issue. Its current market price
a) Calculate the price earnings (P/E) ratio based on the reported NPAT and current
market price (to one decimal place).
b) Blake has information from a broker that forecasts WOW’s EPS for the coming
financial year as $1.485 per share. The current industry average P/E ratio is 14.05.
Calculate the ‘fair’ price based on the earnings forecast.
c) Discuss whether, based on the calculations above, WOW justifies a buy, hold or sell
- DaveLv 51 decade agoFavorite Answer
(1) (P/E) ratio = Market price / Earnings = 26.5/(1.294/1.207)=24.7
The (P/E) ratio is 24.7. That means the market price of the WOW is 24.7 times of its yearly earnings.
(2) Fair price = P/E ratio * EPS = 14.05 * 1.485 = $20.86
The fair price based on the earnings forecast is $20.86
(3) Based on the information given the current market price of WOW is $26.5, and the fair price as calculated in (2) above is $20.86. Apparently, WOW's current share price is over valued (超買) by $5.64 ($26.5 - $20.86). Blake is accordingly recommended to sell the shares.