Question: 3. 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
3. 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 P/E (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)?
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