Question

Go to any Finance website, and get the following information of a stock you chose:

(1) recent market price (2) EPS (3) P/E ratio, and (4) DPS. Calculate the firm’s dividend payout ratio. Explain what this number means. Show how P/E ratio is derived. Explain what P/E ratio means. Is this stock P/E ratio too high or too low? Will you buy this stock at this P/E ratio? Attach the website page to your homework

Answer 1

The company selected for the analysis is - eBay Inc.

No	Data	Value
1	Recent Market Price(USD)	54.32
2	EPS or Earnings per share	6.46
3	PE ratio	8.40
4	DPS	0.64

· The recent market price is the last close trade price of the share as per the recent data available with the exchange

· EPS is the earnings per share of the company

· PE is the valuation ratio of Price earnings per share

· DPS is the dividend pay out ratio or Dividend /share

Dividend payout ratio

The earnings per share of the company is 6.46

And The dividend per share DPS = 0.64

It means the company I spaying out 0.64 of the earnings as dividends

So Dividend payout ratio = 0.64/6.46*100 = 9.90%

PE ratio

The PE ratio is derived as the price of the shares divided by the earnings per share

Let for a company

The price of share = P

The net earnings of the company be E

And the Shares outstanding be =O

So the EPS of the company is =earnings / no of shares outstanding or E/O

So the

PE ratio = P /(E/O)   or the Price / EPS

The PE is a valuation ratio and it shows what the investors are willing to pay for per dollar earnings in the company . So PE ratio of 8.40 means the investors are willing to pay out 8.40times more per dollar earning of the company .

If the PE of the company is > PE of industry it is Overvalued

PE of the company is = PE of industry it is Rightly valued

PE of the company is < PE of industry it is undervalued

The e-commerce and internet industry has a PE ratio of around 23.50x. Hence the PE ratio of ebay is lower than that of the industry , and the stock has the potential for price rise in the near future . Hence it is a Good Stock to buy

Thanks