The Allied Computer Co. has sales of $300 million, a net profit margin of 9%, and 10 million shares. It has no preference shares. If Allied share trades at $50 per share, it has a price/earnings ratio of 20.9.

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The price/earnings ratio (P/E) is calculated as the market price per share divided by the earnings per share (EPS). EPS is calculated as (Net Profit Margin * Sales) / Number of Shares. Here, EPS = (0.09 * $300 million) / 10 million shares = $2.70. The P/E ratio is $50 / $2.70 = 18.52, not 20.9.