If a company has a trailing price-earnings ratio of 12 and current earnings of $5 million, the value of its equity if earnings are expected to grow at a rate of 4 percent per year is closest to:
A) $0.4 million.
B) $2.4 million
C) $60 million.
D) $62.4 million.

Question

Quizplus · Accepted Answer

The value of the equity is the current earnings multiplied by the trailing price-earnings ratio divided by the expected growth rate. In this case, the value of the equity is $5 million * 12 / 0.04 = $60 million.

If a Company Has a Trailing Price-Earnings Ratio of 12