Homework Answers
Answer a) P/E Ratio:
Lake Inc = $ 15
River Inc = $ 19
Answer b) River Inc.
Explanation:
For answer a) P/E Ratio Formula = Market price per share / Earnings price per share
Lake Inc = $68/$4.6 = 14.78
River Inc = $72/($3.8) = 18.95
[Working Note: Earning Price per Share(EPS) = Net Income/Outstanding Shares
Lake Inc. EPS = $207000/45000 = $4.6
River Inc EPS = $171000/45000 = $3.8]
For Answer b) High P/E stocks will have better gain potential in the short run or even in the long term. But how high is too high? This always depends on what the investor thinks is high. If there weren’t enough people thinking the stock were worth it, the P/E wouldn’t be so high.
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of the outstanding common stock of Lake Construction Company for
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