Question

A firm just reported its earning as 100 Million dollar. The firm has 10 Million shares. The stock price is $150 per share. What is forward PE ratio if the growth rate is 4%.

Answer 1

Forward P/E ratio = Current Stock price / Estimated future earing per share

Where,

Current Stock price = $150 per share

Estimated future earing per share = current earning per share *(1+growth rate)

Current earning per share = reported earnings /Number of shares

= $100 million /10 million = $10 per share

Therefore,         

Estimated future earing per share = 10 * (1+4%) = $10.4

And

Forward P/E ratio = $150 / $10.4 = 14.42

Therefore forward PE ratio is 14.42