You notice that Coca-Cola has a stock price of $ 40.64 and EPS of $ 1.99. Its competitor PepsiCo has EPS of $ 4.15. But, Jones Soda, a small batch Seattle-based soda producer has a P/E ratio of 33.3. Based on this information, what is one estimate of the value of a share of PepsiCo stock?

The estimated Value of Share of PepsiCo stock will be $20 x $4.15 = $83.

Explanation:

Going by its Peer Average

Coca-Cola P/E ratio = $40.64 divided by $1.99 = $20.42

The Seattle based Soda producer had $33.3, this is very likely as it would incur less Marketing Costs among other Costs compared to Pepsico and Coca-Cola

Very likely Pepsico will be about $20 on average considering the size of its business and costs of doing Business just like its Peer Coca-Cola.

Therefore the estimated Value of Share of PepsiCo stock will be $20 x $4.15 = $83.

PepsiCo's Share Price=$84.74

Explanation:

For Coca-Cola that is comparable to PepsiCo, we can begin the analysis by calculating Coca-Cola P/E ratio can be computed thus"

Coca-Cola P/E's ratio=Stock price/Earnings per share

stock price=$40.64

EPS=$1.99

Coca-Cola's P/E ratio=$40.64/$1.99

Coca-Cola's P/E ratio=$20.42

Using the Coca-Cola's P/E ratio as a proxy for Pepsi-Co the estimate of the value of a share of PepsiCo is calculated as follows:

Coca-Cola P/E's ratio=PepsiCo's Share Price / PepsiCo's Earnings per share

PepsiCo's EPS=$4.15

$20.42=PepsiCo's Share Price/$4.15

PepsiCo's Share Price=$20.42*$4.15

PepsiCo's Share Price=$84.74

Jones Soda's P/E ratio cannot be used as a proxy for PepsiCo as PepsiCo is bigger in size than Jones Soda.