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. 1…

Question

asked Jul 15, 2020 202k views

1 Answer

Ruurtjan Pul · Answer 1 · 2020-07-20T20:34:52+0000

Answer:

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