Question

Company XYZ closed at $46.83 per share with a​ P/E ratio of 14.29

Answer the following questions.

a.	How much were earnings per​ share? (round to nearest cent)
b.	Does the stock seem​ overpriced, underpriced, or about right given that the historical​ P/E ratio is​ 12-14?

Answer 1

Solution:

a)

P/ E ratio = Market price per share / Earning per share

Earnings per share = Market price per share / (P/E ratio)

so ,

Market price per share = $46.83

  P/ E ratio = 14.29

  Earnings per share =  $46.83 /  14.29

= $ 3.277

b)

P/ E ratio = Market price per share / Earning per share

Market price per share =   Earning per share * (P/E Ratio)

Market price per share (12 ; 14 ) = (  $ 3.277 * 12 ;  $ 3.277 *14)

= ( $39.324 ; $45.878)

As the actual market price of $46.83 lies between $39.324 and $45.878.