Skip to main content

Business Accounting Connect Access Card for Financial Accounting: Information and Decisions

An investor can calculate the price-earnings ratio of the company by dividing the market value per share of the stock by the EPS of the stock. An investor is willing to pay more amount for $1 of the current earnings of the company whose price earnings ratio is higher. To calculate: The price-earnings ratio of the four companies. Also, state the company which is undervalued by the market. Company 1: EPS: $12 Market price per share: $176.40 Price-earnings ratio is calculated as follows: Price -earnings ratio = market value per share EPS = $ 176.40 $ 12 = $ 14.7 Company 2: EPS: $10 Market price per share: $96 Price earnings ratio is calculated as follows: Price earnings ratio = market value per share EPS = $ 96 $ 10 = $ 9.6 Company 3: EPS: $7.50 Market price per share: $93.75 Price earnings ratio is calculated as follows: Price earnings ratio = market value per share EPS = $ 93.75 $ 7.50 = $ 12.5 Company 4: EPS: $50.00 Market price per share: $250.00 Price earnings ratio is calculated as follows: Price earnings ratio = market value per share EPS = $ 250.00 $ 50.00 = $ 5.00 The stock of company 4 is investigated as most undervalued by the market. The market value per share and EPS of the company 4 is highest among all the four companies, but the price earning ratio of company 4 is lowest. Therefore, it is most undervalued stock.

An investor can calculate the price-earnings ratio of the company by dividing the market value per share of the stock by the EPS of the stock. An investor is willing to pay more amount for $1 of the current earnings of the company whose price earnings ratio is higher. To calculate: The price-earnings ratio of the four companies. Also, state the company which is undervalued by the market. Company 1: EPS: $12 Market price per share: $176.40 Price-earnings ratio is calculated as follows: Price -earnings ratio = market value per share EPS = $ 176.40 $ 12 = $ 14.7 Company 2: EPS: $10 Market price per share: $96 Price earnings ratio is calculated as follows: Price earnings ratio = market value per share EPS = $ 96 $ 10 = $ 9.6 Company 3: EPS: $7.50 Market price per share: $93.75 Price earnings ratio is calculated as follows: Price earnings ratio = market value per share EPS = $ 93.75 $ 7.50 = $ 12.5 Company 4: EPS: $50.00 Market price per share: $250.00 Price earnings ratio is calculated as follows: Price earnings ratio = market value per share EPS = $ 250.00 $ 50.00 = $ 5.00 The stock of company 4 is investigated as most undervalued by the market. The market value per share and EPS of the company 4 is highest among all the four companies, but the price earning ratio of company 4 is lowest. Therefore, it is most undervalued stock.

Solution Summary: The author explains how an investor calculates the price-earnings ratio of the four companies by dividing the market value per share by the EPS.

Connect Access Card for Financial Accounting: Information and Decisions

Connect Access Card for Financial Accounting: Information and Decisions

8th Edition

ISBN: 9781259662966

Author: John J Wild

Publisher: McGraw-Hill Education

See similar textbooks

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

Blurred answer

Chapter 11, Problem 13E

Chapter 11, Problem 15E

Students have asked these similar questions

None

What is the firm's wacc?

What is the firm's wacc? Please solve this question

Chapter 11 Solutions

Connect Access Card for Financial Accounting: Information and Decisions

Ch. 11 - Prob. 1DQ Ch. 11 - How are organization expenses reported?Ch. 11 - Prob. 3DQ Ch. 11 - What is the difference between authorized shares...Ch. 11 - Prob. 5DQ Ch. 11 - Prob. 6DQ Ch. 11 - Prob. 7DQ Ch. 11 - Prob. 8DQ Ch. 11 - Prob. 9DQ Ch. 11 - Prob. 10DQ

Ch. 11 - Prob. 11DQ Ch. 11 - Prob. 12DQ Ch. 11 - What is the didfference between a stock dividend...Ch. 11 - Prob. 14DQ Ch. 11 - Prob. 15DQ Ch. 11 - Prob. 16DQ Ch. 11 - Prob. 17DQ Ch. 11 - Prob. 18DQ Ch. 11 - Prob. 19DQ Ch. 11 - Prob. 20DQ Ch. 11 - Prob. 21DQ Ch. 11 - Prob. 22DQ Ch. 11 - Prob. 1QS Ch. 11 - Prob. 2QS Ch. 11 - Prob. 3QS Ch. 11 - Prob. 4QS Ch. 11 - Prob. 5QS Ch. 11 - Prob. 6QS Ch. 11 - Prob. 7QS Ch. 11 - Prob. 8QS Ch. 11 - Prob. 9QS Ch. 11 - Prob. 10QS Ch. 11 - Prob. 11QS Ch. 11 - Prob. 12QS Ch. 11 - Prob. 13QS Ch. 11 - Prob. 14QS Ch. 11 - Prob. 15QS Ch. 11 - Prob. 16QS Ch. 11 - Dividend yield A3 Foxburo Company expects to pay a...Ch. 11 - Prob. 18QS Ch. 11 - Prob. 19QS Ch. 11 - Prob. 1E Ch. 11 - Prob. 2E Ch. 11 - Prob. 3E Ch. 11 - Prob. 4E Ch. 11 - Prob. 6E Ch. 11 - Prob. 7E Ch. 11 - York’s outstanding stock consists of 80,000 shares...Ch. 11 - Use the data in Exercise 118 to determine the...Ch. 11 - Prob. 10E Ch. 11 - Prob. 11E Ch. 11 - Prob. 12E Ch. 11 - Prob. 13E Ch. 11 - Prob. 14E Ch. 11 - Prob. 15E Ch. 11 - Prob. 16E Ch. 11 - Prob. 17E Ch. 11 - Prob. 18E Ch. 11 - Prob. 1PSA Ch. 11 - Prob. 2PSA Ch. 11 - Prob. 3PSA Ch. 11 - Prob. 4PSA Ch. 11 - Prob. 5PSA Ch. 11 - Prob. 1PSB Ch. 11 - Prob. 2PSB Ch. 11 - Prob. 3PSB Ch. 11 - Prob. 4PSB Ch. 11 - Refer to Apples financial statements in Appendix A...Ch. 11 - Prob. 2BTN Ch. 11 - Harriet Moore is an accountant for New World...

Knowledge Booster

Background pattern image

Similar questions

SEE MORE QUESTIONS

Recommended textbooks for you

Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Entrepreneurial Finance
Finance
ISBN:9781337635653
Author:Leach
Publisher:Cengage
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning

Text book image

Financial Management: Theory & Practice

Finance

ISBN:9781337909730

Author:Brigham

Publisher:Cengage

Text book image

Cornerstones of Financial Accounting

Accounting

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Cengage Learning

Text book image

Managerial Accounting

Accounting

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:South-Western College Pub

Text book image

Entrepreneurial Finance

Finance

ISBN:9781337635653

Author:Leach

Publisher:Cengage

Text book image

Financial Reporting, Financial Statement Analysis...

Finance

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:Cengage Learning

Text book image

Intermediate Financial Management (MindTap Course...

Finance

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Cengage Learning

SEE MORE TEXTBOOKS