Question

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.

Answer 1

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

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 $= 100,000 * 40 = 4,000,000$

$\therefore$

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