Two firms a and b have identical price earnings ratio. We know that A’s stock price...

Two firms a and b have identical price earnings ratio. We know that A’s stock price is trading at $200/share; net income amounts to $20 billion a year; and the number of shares of A outstanding amounts to 2 billion. On the basis of this information we conclude that B’s earnings yield amounts to:

a.
10.0%

b.
5.0%

c.
4.0%

d.
0.5%

Expert Solution

A stock P/E

=PRICE/earnings per share

=200/(20/2)

=20

so B stock P/E is also 20

B’s earnings yield amounts to

=1/(P/E)

=1/20=5%

jeff jeffy answered 2 years ago

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