A company is expected to generate $125,000 in earnings next period and requires a 16 percent return on equity capital.Using the assumptions of the price-earnings ratio what would be the company's value at the beginning of next period?
A) $781,250
B) $1,250,000
C) $2,000,000
D) $125,000

Question

Quizplus · Accepted Answer

The price-earnings ratio is the ratio of the market price of a share to the annual earnings per share. In this case, the company is expected to generate $125,000 in earnings next period and requires a 16 percent return on equity capital. Therefore, the price-earnings ratio would be 16 / 0.16 = 100. The company's value at the beginning of next period would be $125,000 * 100 = $12,500,000.

A Company Is Expected to Generate $125,000 in Earnings Next