#### What is the P/E ratio?  P/E ratio = Price per share / Earnings per share  Where E stands for EPS in \$, and P stands for the share price in \$  EPS: Earnings per share in \$  P = Price per share of a stock in \$  Implications:  A high P/E ratio often means that the market has high expectations, based on management, growth expectations, as well as knowledge of the company's projects

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# What is the P/E ratio? P/E ratio = Price per share / Earnings per share Where E stands for EPS in \$, and P stands for the share price in \$ EPS: Earnings per share in \$ P = Price per share of a stock in \$ Implications: A high P/E ratio often means that the market has high expectations, based on management, growth expectations, as well as knowledge of the company's projects. Two companies may have the same EPS but very different P/E ratios based on market expectations. Often, we look at a Corp.'s P/E ratio and compare it to the Industry P/E ratio. We can also compare the P/E ratio across industry rivals. Using the ratio: If we know the P/E ratio, and Earnings per share, we can find P or the price per share. This is because P= (P/E) x E Example: If the P/E ratio is 10 and EPS = \$1.5, price per share, P = \$15. Market Value: Knowing P in turn helps us estimate the market value of the firm. If we have P and the number of shares of common stock outstanding, then the market capitalization or market value of the firm = P * Number of common stock shares outstanding. Example: a) If the price of a share is \$20 and there are 2 million shares, then Market Cap = \$20 * 2 million = \$40 million b) If the share price goes down to \$10, then the Market Cap = \$20 million Problem: a) If Corp XYZ reports an EPS of \$3.50 and has a P/E ratio of 20, then the price per share = ___________. b) If the company has 500,000 shares of common stock outstanding, then the market value of the firm = ______________ How do we find EPS? EPS = Net Income after taxes or NOPLAT # of common stock shares outstanding Net Income after taxes in turn found by the following process. Revenue - Cost of goods (COGS) sold = Gross Profit or gross margin Gross Margin - Operating expenses = Net Income before taxes Net Income before taxes - taxes = Net Income after taxes or NOPLAT Example: Revenues = \$ 2 million COGS = \$1.1 million Gross Margin = ____________ Operating expenses = \$300,000 Net Income before taxes = __________ Adjusted taxes = \$160,000 NOPLAT = _____________ If Owner's equity + Retained earnings = \$ 1 million and Liabilities = \$300,000 Then Invested Capital or IC = ____________ ROIC = ____________

## 2.84 USD

### Option 2

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