Cortland Co.'s most recent EPS were $3.25 and they are expected to grow at a rate of 5% for the near future. The stock currently sells for $48.75. What are the price to earnings ratios based on trailing and forecasted earnings per share?
A) 14.30, 15.00
B) 15, 14.30
C) 15.75, 15.00
D) 15, 15.75

Question

Quizplus · Accepted Answer

The price to earnings (P/E) ratio based on trailing earnings per share (EPS) is calculated by dividing the current stock price by the most recent EPS. For Cortland Co., this is $48.75 / $3.25 = 15. The P/E ratio based on forecasted EPS is calculated by dividing the current stock price by the forecasted EPS. The forecasted EPS is the most recent EPS grown at the expected growth rate, which is $3.25 * (1 + 5%) = $3.4125. The P/E ratio based on this forecasted EPS is $48.75 / $3.4125 ≈ 14.30.