To decide whether to buy stock, analysts and investors look at stock prices over time and calculate
Question:
To decide whether to buy stock, analysts and investors look at stock prices over time and calculate the price-earnings (PE) ratio. It compares a stock’s current market value with its earnings per share. Suppose a company has a PE ratio of 10. At that price, investors are willing to pay $10 for every dollar of last year’s earnings. Companies that are expected to grow will have a higher PE ratio than companies in decline. To calculate the PE ratio:
INSTRUCTIONS
Use PETsMART’s consolidated statements of operations in Appendix F to answer these questions. Use the “Basic” earnings per share figure, and round your answer to the nearest whole number.
1. For the fiscal year ended February 1, 2004, calculate the PE ratio assuming PETsMART stock is selling at (a) $32.50 per share and (b) $35.00 per share.
2. Describe how stock price affects the PE ratio. How would you use this ratio in deciding which stocks to buy?
Step by Step Answer:
1 The PE ratio Stock Price EPS x 100 3250 410 x 100 10 3541015929share 2 Stock Price PE ratio i...View the full answer
