1a. Company A has its common stock selling for $36 a share, there is $16 million

Question

1a.    Company A has its common stock selling for $36 a share, there is $16 million of net income, and 8 million shares outstanding. Calculate the Earnings Per Share and Price Earnings ratio. Verify that the Earnings Per Share (EPS) and Price Earnings Ratio (P/E Ratio) is correct.

1b. Company B has its common stock selling for $32 a share, there is $50 million of net income, and 25 million shares outstanding. Calculate the Earnings Per Share and Price Earnings ratio. Verify that the Earnings Per Share (EPS) and Price Earnings Ratio (P/E Ratio) is correct.

Explanation / Answer

1a) EPS = net income / no of shares = 16 million / 8 million = 2$ per share

Price earning ratio = Price of share / EPS = 36 / 2 = 18 times

  VERIFY = Market price based on Net income = 16 million * 18 times = 288 million

Market price of company based on share price = 36 * 8 million share = 288 million

HENCE PROVED.

2)

EPS = net income / no of shares = 50 million / 25 million = 2$ per share

Price earning ratio = Price of share / EPS = 32 / 2 = 16 times

  VERIFY = Market price based on Net income = 50 million * 16 times = 800 million

Market price of company based on share price = 32 * 25 million share = 800 million

HENCE PROVED.

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