Amuzon Corp is currently selling for $30/share and recently reported annual earnings of $2 million, 1 million shares outstanding, and forecasted earnings/share of $2.50 next year. Amuzon Corp.’s trailing P/E ratio is:
a. 15
b. 12
c. 30
d. 6.67%
The Correct Answer and Explanation is :
To calculate Amuzon Corp.’s trailing P/E (Price-to-Earnings) ratio, we can use the formula:
[
\text{P/E Ratio} = \frac{\text{Price per Share}}{\text{Earnings per Share (EPS)}}
]
Step 1: Identify the components
- Price per Share: $30
- Earnings per Share (EPS): To calculate the trailing EPS, we use the formula:
[
\text{EPS} = \frac{\text{Net Earnings}}{\text{Shares Outstanding}}
]
Amuzon Corp. reported annual earnings of $2 million and has 1 million shares outstanding. So,
[
\text{EPS} = \frac{2,000,000}{1,000,000} = 2
]
Step 2: Calculate the trailing P/E ratio
Now that we know the price per share is $30 and the trailing EPS is $2, we can plug these values into the P/E ratio formula:
[
\text{P/E Ratio} = \frac{30}{2} = 15
]
Conclusion
The trailing P/E ratio for Amuzon Corp. is 15.
This ratio tells us how much investors are willing to pay per dollar of earnings. In this case, investors are willing to pay 15 times the company’s earnings per share based on the current share price of $30. The P/E ratio is often used to assess the relative value of a company, with a higher P/E suggesting that investors expect higher future growth in earnings or are willing to pay more for each dollar of current earnings.