CA Inter P6 · Chapter 3 · Question 6 of 9
Profit after tax is ₹ 45,00,000, preference dividend is ₹ 5,00,000 and there are 8,00,000 equity shares in issue. If the market price per equity share is ₹ 60, the price-earnings (P/E) ratio is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 12 times
Explanation
EPS = (PAT - preference dividend) / number of equity shares = (₹ 45,00,000 - ₹ 5,00,000) / 8,00,000 = ₹ 5.00. P/E = market price / EPS = 60 / 5 = 12 times. Leaving out the preference dividend gives EPS of ₹ 5.625 and a P/E of 10.67, which is wrong because equity holders are entitled only to profit after preference dividend.
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