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Price-to-Earnings (P/E) Ratio

A quick glance at the information listed about particular stocks on a stock exchange will show you that the price-to-earnings ratio (P/E) is considered one of the most important. Financial analysts rely on the P/E ratio because earnings are what drive dividends and capital gains, and provide the fundamental value of a business.

The P/E ratio compares the market price of the stock to the earnings per share, or the total value of the equity outstanding to the total income after tax.


The P/E ratio fluctuates based on the market price of the stock. A high price to earnings ratio suggests that investors think the firm has high growth potential. That is, they will pay more for the share today relative to today’s earnings because they expect higher earnings in the future.  We often call P/E ratios multiples. We say that high-tech firms, those that have higher future potential earnings, trade at higher multiples, than low-growth firms like Xerox.

That being said, the P/E ratio is negatively correlated with the riskiness of a stock. An investor will want to pay less for a stock that has uncertain future cash flows than a stock that is guaranteed to make money. As a result, we pay less today for more risky stocks, and risky stocks should have a lower P/E ratio. This points out a trade off. Think of a lottery. It has a high risk – but a high future payoff if you win. On the other hand, stocks in a company, say Coca Cola, have a low risk but not as much growth. Their P/E ratio will reflect the trade off between risk and future returns. 

Stock, PE Ratio, ROE, Price/Book Value, & Profit Margin

GEC Corporation, which markets cleaning chemicals, insecticides and other products, paid dividends of $2.4 per share in 2006 on earnings of $4.00 per share. The book value of equity per share was $40.00. Starting from 2007 earnings are expected to grow 6% a year steadily and ROE will remain on the current level. The stock has a

Price to Earnings Ratio

Please compare CPI's current PE ratio to our competitors to see where we stand in the market. Compare with Proctor & Gamble, Johnson & Johnson and Colgate.

Earnings Per Share and Price Earnings Ratio

1. Burger Palace had earnings after taxes of $900,000 in the year 2009 with 301,000 shares outstanding. On January 1, 2010, the firm issued 32,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 28 percent. (a) Compute earnings per share for the year

Price Earnings Ratio in the United States

I need some help with the following case: Consider Pacific Energy Company and U.S. Bluechips, Inc both of which reported earnings of $750,000. Without new projects, both firms will continue to generate earnings of $750,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 14 percent r

Murphy's, Inc: Balance in retained earnings after dividend; market price per share

10) Murphy's, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $8 per share. The balance sheet shows $32,500 in the capital in excess of par account, $10,000 in the common stock account, and $42,700 in the retained earnings account. The firm just announced a 10% (small) stock d

Financial and Ratio Calculations for Industrial Company #1 and #2

See attached file for proper format. Industrial Company #1 (in millions) 2008 2009 2010 Sales $4,250 $4,500 $4,750 Operating Income $400 $445 $480 Net Income $200 $225 $250 Current Assets $2,500 $2,750 $2,850 Current Liabilities $2,300 $2,450 $2,500 Shares Outstanding 100 100 100 Avera

Compare the ratio of the fundamental value per share that you computed in the previous question to Palm's market price per share (for February 23, 2001). 3. Compare Palm's market P/E on February 23, 2001, with the fundamental P/E you derive. 4. Analyze the approach that Palm's CFO took in trying to ascertain whether or not Palm was fairly valued in February 2001.

See attached worksheet. In 2000, the firm 3Com spun out its personal digital assistant division as Palm Inc. On February 23, 2001, the financial services firm Telerate reported the following information about Palm. The closing price for a share of Palm was $21.69. Palm had 565,946,000 shares outstanding. Its book valu

Manufacturing company's annual report

Find a manufacturing company's annual report. Calculate the following ratios for the company ( company selected below) selected: Return on Assets Return on Equity Gross Profit Margin Debt/Equity Ratio Debt Ratio Current Ratio Quick Ratio Inventory Turnover Total Asset Turnover Price Earnings Ratio Usin

Price to earnings ratio calculations

Foster Corp is considering the acquisition of Regis Corp. Foster has 2 million shares outstanding selling at $30 (or 7.5 times its earnings per share) Regis has 1 million shares outstanding selling at $15 (or 5 times its earnings per share) Fosters would offer to exchange 2 shares of Regis Corp. for 1 share of Foster Corp.

Please I need a step by step explanation for this problem

Use comparable firms for a PE analysis. Find three firms that can serve as comparables for COSTCO WHOLESALE CORPORATION to: Explain why you selected these firms. Explain why the comparable firms are not identical to your firm. Calculate and present the PE ratio for each of the comparable firms and Costco wholesale cor

Price-earnings ratio

Trying to find the price-earnings ratio for the following. Thanks! JE, Inc has $6,400 in sales. The profit margin is 4 percent. There are 6,400 shares of stock outstanding. The market price per share is $1.20. What is the price-earnings ratio?

Price/earnings (P/E) ratios:

Question 13 Price/earnings (P/E) ratios: a. reflect the amount investors are willing to pay for each dollar of earnings. b. can be calculated using either forecast or historical earnings per share. c. can be estimated by dividing the firm's payout ratio by the difference between the required retu

PE ratios and market-to-book ratios questions

I know most of these answers but I want your expertise to confirm what I know is right; can anyone please help with the following questions? 1- How can a company with a high ROE have a low PE ratio? 2- What type of companies have: a. a high PE ratio and a low market-to-book ratio? b. a high PE ratio and a high market

Valuation and P/E

James Preston, the chief financial officer of Preston Resources, has been asked to do an evaluation of Dunning Chemical Company by the president and Chair of the Board, Sharon John. Preston Resources was planning a joint venture with Dunning (which was privately traded), and Sharon and James needed a better feel for what Dunning

P/E ratio for valuing firms

Many experts suggest that the PE ratio is an obsolete way to value firms. Why do they say that and what alternatives exist? Use the Library or other Web resources to find examples that support your answer.

EPS and PE

R and R company currently has net income of $3 million and 1. million common shares outstanding which sell for $20 per share. R and R has decided to issue new stock to raise $4,000,000 to expand its operations. Rand R investment banker will sell the new shares for $18 per share with a spread of 7%. There will be a $60,000 reg

Calculating Dividends, Book Value, PE Ratio

A and B, Inc. is primarily engaged in the worldwide production, processing, distribution, and marketing of food products. The following information is from its 2003 annual report: 2003 2002 Earnings per share $1.08 $1.14 Cash dividends per common share $0.80 $0.76 Market price per common share $12.94 $15.19 Com

Effect on the corporations EPS and PE ratio

The corporation is evaluating an extra dividend vs. a share repurchase. In either case, $13,000 would be spent. Current earnings are $2.60 per share and the stock currently sells for $60 per share. There are 800 shares outstanding. Ignore taxes and other imperfections. I need help with determining the effect on the price per

Elgin Electronics: External Factors and Price-Earnings Ratio

When Elgin Electronics was floated on the market six years ago it was recognised as a growth company, with significant opportunities as a growth company, with significant opportunities for profitable investment. Its profits performance has been in line with performance but its price earnings ratio has fallen over the last three

Securities analysis: P/E ratio

Please help answer the following problems. Provide explanations for each. Markowitz's main contribution to portfolio theory is: a. that risk is the same for each type of financial asset. b. that risk is a function of credit, liquidity and market factors. c. risk is not quantifiable. d. insight about the relat

Differences between these price earnings ratios

Please help with the following problem: Valuation of a Company's Shares The price earnings ratios on Feb 8th 2006 for five companies traded on the London Stock Exchange are listed below. All the companies are quite well know and involved in retailing in the UK. Discuss the factors that might explain the differences betw

Dividened policy - P/E Ratio

Please help with the following problem. Please provide references as part of your solution. Using a current share price of quoted stock , prepare a short report that would give information about company's dividened policy and the price earning ratio currently. Please use current price of Ansoft Corporation "Ticker ANST "

Regression to estimate Industry P/E ratios while controlling

A. Use a regression to estimate Industry P/E ratios while controlling for risk, growth and payout. Choose and justify your choice of which P/E ratio you estimate. Do you recommend manipulating this data in any way prior to your estimation? b. Your boss, the research director, wants his analysts to concentrate on companies