Question

Company XYZ closed at $101.06 per share with a P/E ratio of 15.77. Answer the following questions.How much were earnings per share?Does the stock seem overpriced, underpriced, or about right given that the historical P/E ratio is 12-14?

Answer 1

First, we will start defining the P/E ratio, which is the Price to Earnings ratio, and its formula is given by

`P/E\text{ ratio = }\frac{\text{Value per share}}{\text{Earnings per share}}`

Or briefly, Value over Earnings. In this problem, we have the Value of the Share, when it closed, and the P/E ratio; as such, we will be using the above formula for obtaining the earnings per share.

`15.77=\frac{101.06}{\text{Earnings per share}}\text{ }`

We used the data given in the question. Now, we will clear the Earning per Share:

`\text{Earnings per share = }(101.06)/(15.77)=6.408`

We get then, that the earnings per share were of $6.408.