Chapter 4, Problem 5P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# PRICE/EARNINGS RATIO A company has an EPS of $2.40, a book value per share of$21.84, and a market/book ratio of 2.7×. What is its P/E ratio?

Summary Introduction

To determine: Price/earnings ratio.

Introduction:

Price/Earnings (P/E) Ratio:

It represents the relationship between the market price per share and the book value per share. More is the market/book ratio better is the firm’s condition.

Explanation

Given,

Earnings per share (EPS) are $2.4. Formula to calculate price/earnings ratio, Price/Earningsāratio=MarketĀ priceāperāshareEarningāperāshare Substitute$58.968 for market price per share (working note) and $2.4 for earning per share in the formula, Price/Earningsāratio=$58.968\$2.4=24.57Ć

Here, price/earnings ratio is 24

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