Question

Leonatti Labs’ year-end price on its common stock is $23. The firm has a profit margin of 10 percent, total assets of $50 million, a total asset turnover of 0.60, no preferred stock, and 2 million shares of common stock outstanding. Calculate the PE ratio for Leonatti Labs. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

To Solve the question, we need three formulaes:

1. Total Asset turnover ration =Total Sales (Revenue) / Total Asset  

or, 0.60 = Total Sales / $50 m   

or, Total Sales = $50 m * 0.60 = $ 30 Million

2. Profit Margin (%) = Net Profit * 100 / Total sales (revenue)

or, 10 = Net Profit * 100 / $30 m

or, Net Profit (Earning) = $30 m * 10 / 100 = $ 3 million

3. PE Ratio = Market Price per share / Total Earning per share

Profit (Earning) per share = Net profit / total shares outstanding = $ 3 m / 2 m = $ 1.50

Hence, PE Ratio = $ 23 / $ 1.50 = 15.33.

So, the PE ration for Leonatti Labs is 15.33.

Hope this has solved your query.