In April 2003, analysts at Morgan Stanley and Prudential had set 12-month target
ID: 2731534 • Letter: I
Question
In April 2003, analysts at Morgan Stanley and Prudential had set 12-month target prices of $106 and $108 for the firm eBay. At that time eBay’s stock price was $89.22 and the consensus forecast for eBay’s EPS was $1.45. Subsequently, eBay split its stock two-for-one. Its actual EPS turned out to be $0.82 {postsplit, corresponding to $1.64 on a presplit basis}. On April 30 2004, eBay’s stock price close above $82 ($164 on a presplit basis), and the consensus analyst EPS forecast for the subsequent 12 months was $1.18(postsplit). Discuss whether the stock of eBay was efficiently priced in April 2003
Explanation / Answer
Yes, the stock of eBay was efficiently priced in April 2003.
This is because prior to the split of stock of eBay the stock price was $89.22 and EPS was $1.45 which provide us the P/E ratio of 61.
Post split, on April 30 2004, eBay’s stock price close above $82 and the consensus analyst EPS forecast $1.18, so the resultant P/E ratio comes to 69. So, the P/E ratio is well above the Pre-split P/E ratio, thus the stock is fairly priced.