Compare the stock prices produced

1. To calculate an estimate of JNJ price based on a comparable P/E ratio, multiply the industry average P/E ratio by JNJ’s EPS.

2. Compare the stock prices produced by the two methods to the actual stock price. What recommendations can you make as to whether clients should buy or sell JNJ stock based on your price estimates?

3. Explain to your boss why the estimates from the two valuation methods differ. Specifically address the assumptions implicit in the models themselves as well as the assumptions you made in preparing your analysis. Why do these estimates differ from the actual stock price of JNJ?

Solution:

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