Question

Hi, please help me to solve this question and tell me how you get this answer. Thank you.

Dragonstone Corp. has a price earnings ratio of 12 and a dividend yield of 3.2%. Lionworks, Inc. has a price earnings ratio of 15 and a dividend yield of 0.38%. Based on this information, it appears that investors think: O A. Lionworks has a bright future, but Dragonstone does not. O B. Dragonstone has a bright future, but Lionworks does not. O C. Both companies have a bright future, but Dragonstone is expected to grow more than Lionworks. O D. Both companies have a bright future, but Lionworks is expected to grow more than Dragonstone.

Answer 1

PE Ratio refers to comparision made by analyst to compare the Company current market price or share price of the company with the Earning share price of the company. In other words it helps to identify the multiplier number of earning price with the market value of share In simple , PE ratio = Market Value per share(MPS) / Earning Per share(EPS) Assume Market price is $100 EPS = MPS/PE ratio Therefore EPS of Dragon Stone = 100/12 EPS of Dragon Stone = 8.33 EPS of Lion's work = 100/15 EPS of Lion's work = 6.67 Dividend yield Represent the return you are getting by investing in the equity of particular company Dividend yield of Dragon stone 3.20% Dividend yield of Lion's work 0.38% With higher EPS and increase in Dividend yield of dragon stone is expected to grow much more higher compare to lower EPS and dividen yield of Lion stone. Answer:C Both the companies have bright future (with positive EPS) but dragonstone is expect to grow morethan lion's work (Because of higher EPS & dividend yield)