QUESTION A

The EPS is $$0\mathrm{.}60,$ the dividends per share are $$0\mathrm{.}20,$ and the capital gains per share are $$0\mathrm{.}40.$ The dividend $y$

earnings$-$price ratio is $1\mathrm{.}50,$ and the $\frac{P}{E}$ ratio is $2\mathrm{.}50.$

QUESTION B

There are a number of ways to measure the $\frac{P}{E}$ ratio in practice, and the most common method is to use the

months $($TTM$)$ earnings per share $($EPS$)$ figure

Explanation:

QUESTION A

EPS is calculated by dividing net income by the total number of shares in issue.

Therefore, earnings before interest and taxes are equal to $$600$ minus $$200,$ divided by $1,000,$ which eq

The formula for calculating dividends per share is as follows: dividends shares outstanding.

Therefore, dividends per share $=$$$\frac{200}{1},000=$$$0\mathrm{.}20$

The formula for calculating capital gains per share is as follows: capital gains per share $=($share price at

at $t=0)/$ shares outstanding

Therefore, the capital gains per share equal $($ $$1\mathrm{.}20$ minus $$1\mathrm{.}00)$ divided by $1,000,$ which equals $$0\mathrm{.}40$

The dividend yield can be calculated by dividing the annual dividends paid out by the share price as of tir

Therefore, dividend yield equals $$0\mathrm{.}20$ divided by $$1\mathrm{.}20,$ which equals $2\%.$

Earnings$-$to$-$price ratio equals EPS divided by share price at time $t=1$

Therefore, the price$-$earnings ratio equals $1\mathrm{.}50$ if $$0\mathrm{.}60$ is divided by $$1\mathrm{.}20.$

$\frac{P}{E}$ ratio equals share price at time $t=1$ divided by EPS.

Therefore, the price to earnings ratio is $1\mathrm{.}20$ times $0\mathrm{.}60,$ or $2\mathrm{.}50.$

QUESTION B

To determine this, take the earnings per share $($EPS$)$ figure for the previous four quarters and divide that num

This method, on the other hand, has the potential to be deceptive because it may provide an erroneous impre

current earnings power of the company.

The price$-$to$-$earnings ratio that leads to the highest share price is the one that represents the ideal scenario.

to the fact that the P$/$E ratio is a measurement of the amount of money that investors are willing to pay for ea

company's earnings. If the price$-$to$-$earnings ratio is excessively high, then investors are paying an excessive

each dollar of earnings, which will eventually lead to a decline in the share price. If the price$-$to$-$earnings ratio

indicates that investors are not willing to pay enough for each dollar of earnings, which will eventually lead to

in the price of the shares.

There are a number of reasons why the actual P$/$E ratio might not match the "ideal" P$/$E ratio. First, because a

earnings can change from one year to the next, the trailing twelve$-$month earnings per share figure may not $b$

accurate reflection of the company's current ability to generate profits. Second, the share price of a company

affected by factors other than its earnings, including its dividend payout ratio, its growth prospects, and the g

conditions of the market as a whole.