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Thread: I think I'm missing something using the Price-to -Earnings Ratio formula??

  1. #1
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    I think I'm missing something using the Price-to -Earnings Ratio formula??

    Using the Price-To-Earnings Ratio formula. Please help!!

    I posted this morning but I can't see it so I'm trying again.

    There are 2 companies, Alpha Oil with a share price of 5.00 dollars and Omega Oil with a share price of 10.00 dollars. Michael owns 500 Alpha Oil shares and 250 Omega Oil Shares.

    Alpha Oil shares increase by 10% and the price to earnings ratio remains at 10.
    Omega Oil increases by 8% and the price to earnings ratio reduces from 10 to 8.
    What is the expected gain to Michael?

    Equation: Price to Earnings Ratio= stock price per share/earnings per share
    Alpha Oil: 10=5.00/0.50=10
    Omega Oil: 8=10.00/0.80=12.50

    The textbook answer is 612.50 and I do not know how they arrived at this??

    The way I worked it was:
    Alpha Oil increased by 0.50x500 shares= 250
    Omega Oil increased by .8x250 shares = 200
    Therefore: 200+250=$450.
    Am I missing something??
    Please help!!
    Last edited by topsquark; May 9th 2018 at 03:59 PM. Reason: Tweaked dollar signs
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  2. #2
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    Re: I think I'm missing something using the Price-to -Earnings Ratio formula??

    I would rewrite the equation as Earnings Per Share = Stock Price Per Share / Price to Earnings Ratio, and calculate earnings per share directly.

    Part of the solution.

    For Alpha Oil, Earnings Per Share = 5*(1.10) / 10 = 0.55 per share
    I'll leave calculating Earnings Per Share for Omega Oil on your own.
    Sum of earnings can then be calculated as Number Shares(Alpha)*Earnings Per Share(Alpha) + Number Shares(Omega)*Earnings Per Share(Omega)
    Last edited by MacstersUndead; May 10th 2018 at 12:52 PM.
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