The company Glamour plc. has undertaken an investment of £1,000,000 from which it expects earnings of £50,000 next year, growing at 10% annually. Moreover, the company depreciates 5% of its capital each year and requires total capital expenditure (replacement expenditure and net new investment) of 8%. Company Value has the same investment outlay, depreciation and capital expenditure, but earnings growth of 5% and expected first period earnings of £100,000. Moreover, both companies have the same cost of capital of 15%.
Calculate the price earnings ratio for each company.
Price earnings ratio is found.