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Company A, B, and C have market capitalization of $600,000, $200,000, $50,000 respectively and have net...

Company A, B, and C have market capitalization of $600,000, $200,000, $50,000 respectively and have net income of $20,000, $10,000, $1,000 respectively. All companies reported outstanding shares of 1,000. Which company do you want to invest in? Give the reason why you choose the company?

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Answer #1

price per share = market capitalisation / number of shares

company price per share
A $600,000 / 1000 shares =>$600
B $200,000/1000 shares =>$200
C $50,000 / 1000 shares =>$50

EPS = net income / number of shares

company Earnings per share
A $20,000/1000=>$20
B $10,000/1000=>$10
C $1000/1000=>$1

PE ratio = Price per share / earnings per share

A $600/20=>30
B $200/10=>20
C $50/1=>50

Since the PE ratio of C ish the highest it is the first preference for investment.

A company with high PE ratio will have the potential to grow more.

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