Which of the following formulas regarding earnings to price ratio is true:
A) EPS/Po = r[1 + (PVGO/Po]
B) EPS/Po = r[1 - (PVGO/Po)]
C) EPS/Po = [r + (PVGO/Po)]
D) EPS/Po = [r + (1 + (PVGO/Po)]/r

Question

Quizplus · Accepted Answer

The formula EPS/Po = r[1 - (PVGO/Po)] is the correct formula for earnings to price ratio, also known as the P/E ratio. This formula takes into account the current market price (Po), the earnings per share (EPS), the required rate of return (r), and the present value of growth opportunities (PVGO). The subtraction of PVGO from Po represents the value of current earnings, while the inclusion of r accounts for the investor's required return.

Which of the Following Formulas Regarding Earnings to Price Ratio