Question

Consider the following information which relates to a given company:

Item

2019 Value

Earnings Per Share

$6.84

Price Per Share (Common Stock)

$36.65

Book Value (Common Stock Equity)

$64 Million

Total Common Stock Outstanding

2.8 Million

Dividend Per Share

$4.08

Analysts expect that the company could maintain a constant annual growth rate in dividends per share of 6% in the future, or possibly 8% for the next 2 years and 7% thereafter. In addition, it is expected that the risk of the firm, as measured by the risk premium on its stock, to increase immediately from 8.7% to 12%. Currently, the risk-free rate is 5%.

Required: (b) Determine the firm's P/E ratio.

Answer 1

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS).

P/E = Price/ Earnings = 36.65/ 6.84= 5.3582 times

A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future.