Question

Suppose that the MC Software Corporation earns a profit of $10 per share. If the prevailing interest rate is 12 percent and the stock is currently selling for $100 per share, what is the current price/earnings ratio

Answer 1

Price Earning Ratio = Price/Earnings = we use the general formula.

`(100)/(10)`

$100/$10 = 10 times

Step-by-step explanation:

Price Earning ratio is calculated using the current market price of share and earnings per share of the company. In the given question there is no relevance of interest rate as this is not the cost of equity.

Price Earning Ratio tells how much earnings are required to meet the cost of 1 share.

Another formula for P/E ratio = 1/Cost of Equity. Since 12% is not cost of equity this formula cannot be used.

Also earnings per share is given assumed it is after interest cost if any.