Question

A company has 70,000 common stocks with a price of $15 per share, and a net income available for common stocks of $220,000. and a total equity of $150,000. find: P/E ratio, M/B ratio.

Answer 1

First we will calculate earnings per share as below:

Earnings per share = Net income available for common stocks / Number of common shares

Earnings per share = $220000 / 70000 = $3.14 per share

Next, we will calculate book value per share as below:

Book value per share = Total equity / Number of common shares

Book value per share = $150000 / 70000 = $2.14 per share

Now, P/E ratio is given by:

P/E ratio = Price per share / Earnings per share

P/E ratio = $15 / $3.14 = 4.78

M/B ratio is given by:

M/B ratio = Price per share / Book value per share

M/B ratio = $15 / $2.14 = 7.01