Numericals on price to earnings ratio pdf
1. Company ABC has a market price per share of ₹50 and an EPS of ₹5. Calculate its P/E ratio.
Answer: P/E Ratio = ₹50 / ₹5 = 10.
2. Reliance Inc. has a forward EPS projection of ₹8 and a current market price per share of ₹120. What is its forward P/E ratio?
Answer: Forward P/E Ratio = ₹120 / ₹8 = 15.
3. Company Adani Power has a P/E ratio of 18, and the industry average P/E ratio is 20. Determine if DEF’s shares are relatively cheap or expensive compared to its industry peers.
Answer: DEF’s shares are relatively cheap compared to its industry peers because its P/E ratio is lower than the industry average.
4. Calculate the market price per share of a company if its P/E ratio is 25 and its EPS is ₹6.
Answer: Market Price per Share = P/E Ratio × EPS = 25 × ₹6 = ₹150.
5. A company’s earnings estimates for the next period have increased, causing its forward EPS to rise from ₹4 to ₹5. If its market price per share remains constant at ₹60, what is the new forward P/E ratio?
Answer: New Forward P/E Ratio = ₹60 / ₹5 = 12.
6. Company ONGC has a P/E ratio of 30, while Company JKL has a P/E ratio of 15. Which company’s shares are perceived as more expensive by investors?
Answer: Company GHI’s shares are perceived as more expensive because it has a higher P/E ratio.
7. If a company’s P/E ratio decreases from 20 to 15 while its EPS remains constant at ₹3, what happened to its market price per share?
Answer: Market Price per Share decreases because the P/E ratio decreased, indicating that investors are willing to pay less per unit of earnings.
8. A company’s P/E ratio is 12, and its EPS is ₹8. If its market price per share increases by 25%, what is the new P/E ratio?
Answer: New Market Price per Share = ₹8 × 1.25 = ₹10. New P/E Ratio = ₹10 / ₹8 = 12.5.
9. Company NTPC’s P/E ratio is 22, and its EPS is ₹2. Calculate its market price per share.
Answer: Market Price per Share = P/E Ratio × EPS = 22 × ₹2 = ₹44.
10. A company has a P/E ratio of 20 and an expected earnings growth rate of 25%. What is the PEG ratio?
Answer: PEG ratio = P/E ratio ÷ Growth rate = 20 ÷ 25 = 0.8
11. A company’s P/E ratio is 16, and its market price per share is ₹64. Calculate its EPS.
Answer: EPS = Market Price per Share / P/E Ratio = ₹64 / 16 = ₹4.
12. XYZ Inc. has reported a net profit after tax (NPAT) of $1,000,000 for the fiscal year. The company has 100,000 equity shares outstanding.
- Earnings per Share (EPS): EPS = NPAT / Number of equity shares outstanding EPS = $1,000,000 / 100,000 = $10This means that for each equity share of XYZ Inc., the company has earned a profit of $10.
- Book Value per Share: Let’s assume that the net worth of XYZ Inc. is $5,000,000.Book Value per Share = Net Worth / Number of equity shares outstanding Book Value per Share = $5,000,000 / 100,000 = $50This indicates that each equity share of XYZ Inc. represents a book value of $50 based on the company’s net worth.
- Price to Earnings Ratio (P/E Ratio): Now, let’s assume that the current market price per share of XYZ Inc. is $120.P/E Ratio = Market Price per share / Earnings Per Share (EPS) P/E Ratio = $120 / $10 = 12The P/E ratio of 12 implies that investors are willing to pay $12 for every $1 of earnings generated by XYZ Inc. This ratio provides insights into the valuation of the company’s stock relative to its earnings. In this case, investors are valuing XYZ Inc. at 12 times its earnings per share.
Price to earnings ratio
A higher P/E ratio may suggest that the stock is relatively overvalued compared to its earnings, while a lower P/E ratio may indicate that the stock is undervalued.