May Stewart, CFA, a retail analyst, is performing a P/E - based comparison of two hypothetical jewelry

Question:

May Stewart, CFA, a retail analyst, is performing a P/E - based comparison of two hypothetical jewelry stores as of early 2009. 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 (basic and diluted) in 2008, and is expected to earn $ 2.20 (basic and diluted) in 2009.
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 2008 to $ 0.50 (versus the $ 0.75 that it earned in 2007).
For 2009, 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 P/E (trailing or forward) should Stewart use to compare the two companies’valuation?
B. Which of the two stocks is relatively more attractive when valued on the basis of P/Es (assuming that all other factors are approximately the same for both stocks)?

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...

Fantastic news! We've Found the answer you've been seeking!