Which of the following formulas is used to estimate a stock's price based on the benchmark Price-Earnings (PE) ratio?

• A. Estimated Stock Price = Benchmark PE Ratio \( + \) Earnings per Share (EPS)
• B. Estimated Stock Price = Benchmark PE Ratio \( \times \) Earnings per Share (EPS)
• C. Estimated Stock Price = Earnings per Share (EPS) \( \div \) Benchmark PE Ratio
• D. Estimated Stock Price = Benchmark PE Ratio \( - \) Earnings per Share (EPS)

Answer: (B)

Verified step by step guidance

1. Understand the concept of the Price-Earnings (PE) ratio: The PE ratio is a valuation metric that compares a company's stock price to its earnings per share (EPS). It is used to estimate the relative value of a stock.
2. Identify the correct formula for estimating a stock's price based on the benchmark PE ratio. The formula is: Estimated Stock Price = Benchmark PE Ratio × Earnings per Share (EPS).
3. Break down the formula: The Benchmark PE Ratio represents the market's valuation of earnings, and multiplying it by the EPS gives the estimated stock price.
4. Compare the given options: Analyze each formula provided in the problem and eliminate incorrect ones based on the mathematical relationship between PE ratio, EPS, and stock price.
5. Conclude that the correct formula is the one that uses multiplication (Benchmark PE Ratio × EPS), as this aligns with the standard financial accounting principle for estimating stock price using PE ratio.