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Fundamentals of Financial Manageme...

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

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BuyFindarrow_forward

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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