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

May 2018
1
0
Australia
[h=2]Using the Price-To-Earnings Ratio formula. Please help!![/h]
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 a moderator:
Jan 2009
454
132
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: