Question

Given the following information, determine the price-earnings ratio. Market price of common stock at year-end $55.00 Earnings per share 8.00 Dividends per share 4.00 a. 6.9 b. 13.75 c. 6.9% d. 14.5%

Answer 1

a. 6.9

Step-by-step explanation:

`(Market \: Price)/(EPS)  = $Price-Earnings Ratio`

55/8 = 6.875 = 6.9

This means purchase a share of this company is paying 6.9 times his annual earnings.

It could be interpreted both ways:

• if this is high, the market can expect to grow their earnings soon or...the share is overstated and will not increase his value shortly.

• If this is considered low, then the market expects its earnings to decrease or ... the share is understated and will increase their valuation soon