Problem 83
Question
If the market value per share of Microsoft Corp. stock is \(\$ 30.16\) and the earnings per share are \(\$ 1.39\), find the \(\mathrm{P} / \mathrm{E}\) ratio. Round to the nearest hundredth.
Step-by-Step Solution
Verified Answer
21.70
1Step 1 - Understand the P/E Ratio Formula
The P/E ratio, or Price-to-Earnings ratio, is calculated by dividing the market value per share by the earnings per share (EPS). The formula for P/E ratio is: \[ P/E = \frac{ \text{Market Value per Share} }{ \text{Earnings per Share} } \]
2Step 2 - Plug in the Given Values
Using the given values: Market value per share = \$30.16 and Earnings per share = \$1.39, substitute these into the formula: \[ P/E = \frac{ 30.16 }{ 1.39 } \]
3Step 3 - Calculate the P/E Ratio
Perform the division to find the P/E ratio: \[ P/E = 30.16 \div 1.39 \approx 21.70 \]
4Step 4 - Round to the Nearest Hundredth
The result from the division is approximately 21.70. Since it is requested to round to the nearest hundredth, the final P/E ratio is 21.70.
Key Concepts
Market Value per ShareEarnings per SharePrice-to-Earnings Ratio Calculation
Market Value per Share
Market value per share, also known as stock price, is the current price at which a company's shares are traded in the market. It reflects the value investors are willing to pay for a single share of the company. The market value per share can be influenced by various factors such as company performance, investor expectations, and market conditions.
For instance, in the given exercise, Microsoft Corp.'s market value per share is \( \$30.16 \). This means that each share of Microsoft stock is being traded at \( \$30.16 \) in the market at the time of calculation.
Knowing the market value per share is crucial as it helps investors determine the value of their investment and make informed decisions about buying or selling stocks.
For instance, in the given exercise, Microsoft Corp.'s market value per share is \( \$30.16 \). This means that each share of Microsoft stock is being traded at \( \$30.16 \) in the market at the time of calculation.
Knowing the market value per share is crucial as it helps investors determine the value of their investment and make informed decisions about buying or selling stocks.
Earnings per Share
Earnings per share (EPS) is a key financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It is calculated by dividing the net income of the company by the number of outstanding shares. EPS is an important measure as it helps investors understand a company's profitability on a per-share basis.
In our exercise, the earnings per share for Microsoft Corp. is \( \$1.39 \). This implies that for each share of Microsoft, the company has earned \( \$1.39 \) over the given period. Higher EPS generally indicates better profitability, which might attract more investors and can positively impact the market value per share.
In our exercise, the earnings per share for Microsoft Corp. is \( \$1.39 \). This implies that for each share of Microsoft, the company has earned \( \$1.39 \) over the given period. Higher EPS generally indicates better profitability, which might attract more investors and can positively impact the market value per share.
Price-to-Earnings Ratio Calculation
The Price-to-Earnings (P/E) ratio is a popular financial metric used to evaluate whether a stock is over or under-valued. It is calculated by dividing the market value per share by the earnings per share (EPS). The P/E ratio helps investors assess the valuation and growth potential of a company relative to its earnings.
Let’s break down the P/E ratio calculation with our example:
1. We have the market value per share for Microsoft Corp., \( \$30.16 \).
2. The earnings per share (EPS) for Microsoft Corp. is \( \$1.39 \).
Using the formula: \[ \text{P/E} = \frac{ \text{Market Value per Share} }{ \text{Earnings per Share} } \] we substitute the values: \[ P/E = \frac{ 30.16 }{ 1.39 } \approx 21.70 \]
This calculation shows us that Microsoft's P/E ratio is approximately 21.70. This means investors are willing to pay \( \$21.70 \) for every \( \$1 \) of earnings, indicating the perceived value and future growth expectations investors have for Microsoft.
Let’s break down the P/E ratio calculation with our example:
1. We have the market value per share for Microsoft Corp., \( \$30.16 \).
2. The earnings per share (EPS) for Microsoft Corp. is \( \$1.39 \).
Using the formula: \[ \text{P/E} = \frac{ \text{Market Value per Share} }{ \text{Earnings per Share} } \] we substitute the values: \[ P/E = \frac{ 30.16 }{ 1.39 } \approx 21.70 \]
This calculation shows us that Microsoft's P/E ratio is approximately 21.70. This means investors are willing to pay \( \$21.70 \) for every \( \$1 \) of earnings, indicating the perceived value and future growth expectations investors have for Microsoft.