   Chapter 4, Problem 5P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PRICE/EARNINGS RATIO A company has an EPS of $2.00, a book value per share of$20, and a market/book ratio of 1.2x. What is its P/E ratio?

Summary Introduction

To determine: Price/earnings ratio.

Price/Earnings (P/E) Ratio: It represents the relationship between market price per share and book value per share. More is the market/book ratio, the better is the firm’s condition.

Explanation

Solution:

Given,

Earnings per share (EPS) are $2. Calculated values (working note), Market price per share is$24.

Formula to calculate price/earnings ratio,

Price/Earningsratio=PricepershareEarningpershare

Substitute $24 for price per share and$2 for earning per share in the formula,

Price/Earningsratio=$24$2=12×

Here, price/earnings ratio is 12×

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