Friday, June 22, 2012
A company has Earnings per Share (EPS) of $1.50, a cash flow per share (CPS) of $3.00, and a price /cash flow ratio of 8.0.What is its price to earnings (P/E) ratio?
First, when approaching the type of problem, it is useful to list all the information that will be required to calculate the price to earnings (P/E) ratio.
EPS = $1.5
Cash Flow Per share = $3
Price/Cash Flow Ratio = 8.0
P/E Ratio Formula = Market Value Per Share/ EPS
Second, the next step will be to use the available information to calculate earnings per share.
Price / Cash Flow Ratio of 8 = Price Per Share / $3
Price Per Share = 8 X $3 = $24
Use the Price to Earnings Equation for the final computation:
P/E Ratio = Market Value Per Share/ EPS = $24/$1.5 = 16
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