Question

The price-earnings ratio P/E is the ratio (market value of one share)/(earnings per share). If P/E increases by 17% and the earnings per share decrease by 8%, determine the percentage change in the market value. Round your answer to the nearest percentage point.

Answer 1

The percentage change in the market value can be calculated using the formula (Percentage change in P/E - Percentage change in earnings per share) / (1 + Percentage change in P/E) * 100. Plugging in the given values, the percentage change in the market value is 21.37%.

Step-by-step explanation:

The price-earnings ratio (P/E) is the ratio of the market value of one share to the earnings per share. To determine the percentage change in the market value when the P/E increases by 17% and the earnings per share decrease by 8%, we can use the formula:

Percentage change in market value = (Percentage change in P/E - Percentage change in earnings per share) / (1 + Percentage change in P/E) × 100

Plugging in the given values:

Percentage change in market value = (17% - -8%) / (1 + 17%) × 100

Percentage change in market value = (25%) / (1.17) × 100

Percentage change in market value = 21.37%

Answer 2

Share price = 8%

Step-by-step explanation:

P/E ratio = (1+17%) = 1+0.17 = 1.17

Earning per share = (1-8%) = 1-0.8 = 0.92

P/E ratio = Share price / earning per share

1.17 = Share price / earning per share

Share price = 1.17 x earning per share

Share price = 1.17 x 0.92 = 1.0764

Change in share price = 1.0764 - 1 = 0.0764 = 7.64% = 8% (rounded off )