Answer to Question #252298 in Finance for prachi

Question #252298

The equity shares of a firm in the current stock market has been traded at Rs60 per share. The price earnings ratio is 10 times. The Dividend payout ratio is 75%. The total number of shares issued and outstanding as on date are 100000 equity shares of Rs10 each. Book value of each share is Rs40 Describe and Compute - Earnings per share, return on equity.

Expert's answer

Earning per share is the company's profit divided by the company's outstanding shares.

"EPS = \\frac{Net profit}{Outstanding shares}"

where "EPS -" is the earnings per share

The price earnings ratio "\\frac{P}{E}= \\frac{Share price}{Earnings per share}"

To determine EPS

"\\frac{P}{E} is provided = 10"

Share price "= 60"

Therefore EPS "= \\frac{share price}{Price earning ratio}"

"EPS =\\frac {60}{10} = 6"


Return on equity shows investors how efficiently a company is handling the investors' money.

Return on Equity ROE "= \\frac{Net Income}{Shareholders Equity}"

To determine ROE

Dividend Payout Ratio "= \\frac{Total Dividend}{Net income}"

but Dividend payout ratio "= 75\\%"

Total dividend = "= Total equity * earning per share"

Total divided "= 100,000 * 6 = 600,000"

Therefore "\\therefore"

Net income "= \\frac{Total divided}{Divided payout ratio}"

Net income "= \\frac{600000}{75\\%} = 450,000"

Shareholders equity "=Total number of shares * book value of each share"

Shareholders equity "= 100,000 * 40 = 4,000,000"


"ROE = \\frac{450,000}{4000,000} *100 = 11.25\\%"

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12.11.21, 18:38

Thank you very very much Sir, you are great as you provide the exact and accurate answer and please provide help always in the future. Thanks again

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