Which PIE (trailing or leading) should Stewart use to compare the two companies valuation?
QUESTION
May Stewart, CFA, a retail analyst, is performing a P/E-based comparison of two jewelry stores as of early 2001. She has the following data for Hallwhite Stores (HS) and Ruffany (RUF).
HS is priced at $44. RUF is priced at $22.50.
HS has a simple capital structure, earned $2.00 per share in 2000, and is expected to earn $2.20 in 2001.
RUF has a complex capital structure as a result of its outstanding stock options.
Moreover, it had several unusual items that reduced its basic EPS in 2000 to $0.50(versus the $0.75 that it earned in 1999).
For 2001, Stewart expects RUF to achieve net income of $30 million. RUF has 30 million shares outstanding and options outstanding for an additional 3,333,333 shares.
A. Which PIE (trailing or leading) should Stewart use to compare the two companies” valuation?
B. Which of the two stocks is relatively more attractively valued on the basis of P/Es (assuming that all other factors are approximately the same for both stock)?
Please find the solution
in attached file.
ANSWER:
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