Question

Question 1

(a) If Company A has a price per share of $40 and an earnings per share of $10, and Company B has a price per share of $30 and earnings per share of $3,what is the P/E  

multiple of each.Which Company has a higher expected future earnings growth rate and why?

(b) How do we calculate the Times Interest Earned Ratio ? What does it tell us ?

(c) Why might a lender be more focused on liabilities - to- Assets Ratio rather than Debt- to- Equity Ratio ?

Answer 1

a]	P/E of Company A = 40/10 =	4.00
	P/E of Company B = 30/3 =	10.00
	Company B has higher expected future earnings and growth
	rate as it has higherP/E, which is an indication that the market
	has higher expectations about the future performance of the
	company; the reason why the market is able to purchase its
	stock at a higher multiple of its EPS.
b]	TIE is given by the formula EBIT/Interest expense. It tells how
	many times the EBIT is, in comparison with the interest expense.
	More the number of times more is the safety for the creditors.
c]	The liabilities to assets ratio, tells directly, how much of the
	assets have been financed out of debt. Lower the ratio higher is
	the safety for the creditors.
	In comparison, the debt/equity ratio tells the number of times
	debt is of equity. Though it indicates the financial leverage, it
	does not directly indicate the safety to the creditors.