CMA Study Group

why do they multiply by the P/E to get the values of shares?

A corporation has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the stock has a price-earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in the corporation's stock immediately after the split is

A.	$3,000
B.	$2,000
	Answer (B) is correct. EPS equals $2.50 ($500,000 NI ÷ 200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares × $2.50 EPS × 8 P/E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.
C.	$250
D.	$1,333

------------------------------
Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------

P/E ratio = Market Price per share divided by Earnings per share.

We are given P/E ratio is 8. 
Plugging P/E= 8 in the P/E  ratio formula, we get:

Market Price Per Share = 8* 2.5 = 20

So, Market Price of 100 share = 20 *100 = 2000

hope this works

------------------------------
Soharab Hossain
Accountant
Shibpur,Narsingdi
Bangladesh
------------------------------

Original Message:
Sent: 12-28-2020 12:27 PM
From: Tayba Al-Mehdar
Subject: CMA part 2 help answer q

why do they multiply by the P/E to get the values of shares?

A corporation has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the stock has a price-earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in the corporation's stock immediately after the split is

A.	$3,000
B.	$2,000
	Answer (B) is correct. EPS equals $2.50 ($500,000 NI ÷ 200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares × $2.50 EPS × 8 P/E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.
C.	$250
D.	$1,333

------------------------------
Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------

From my understanding,

 Earning x P/e = Market price of the firm

=> Market price of the firm = 8*500.000=4.000.000$

=> Market price per share = 4.000.000 : 200.000 = 20

=> Market price of 100 shares before splitting = 20 x 100 = 2.000$

This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.

------------------------------
TUAN NGUYEN ANH
Accountant
Ho Chi Minh City
Viet Nam
------------------------------

Original Message:
Sent: 12-28-2020 12:27 PM
From: Tayba Al-Mehdar
Subject: CMA part 2 help answer q

why do they multiply by the P/E to get the values of shares?

A corporation has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the stock has a price-earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in the corporation's stock immediately after the split is

A.	$3,000
B.	$2,000
	Answer (B) is correct. EPS equals $2.50 ($500,000 NI ÷ 200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares × $2.50 EPS × 8 P/E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.
C.	$250
D.	$1,333

------------------------------
Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------

The formula for P/E is = market price/EPS

so market price will be 2.50 X 8 = 20 

so the value of 100 shares will be 100 X 20 = 2000

------------------------------
Stacey Pinto
Accountant
Dubai
United Arab Emirates
------------------------------

Original Message:
Sent: 12-28-2020 12:27 PM
From: Tayba Al-Mehdar
Subject: CMA part 2 help answer q

why do they multiply by the P/E to get the values of shares?

A corporation has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the stock has a price-earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in the corporation's stock immediately after the split is

A.	$3,000
B.	$2,000
	Answer (B) is correct. EPS equals $2.50 ($500,000 NI ÷ 200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares × $2.50 EPS × 8 P/E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.
C.	$250
D.	$1,333

------------------------------
Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------

Hi Tayba, the formula for the Price/Earnings (PE) ratio is Market Price (MP) divided by Earnings Per Share (EPS).  The formula would look like this: PE=MP/EPS.  To isolate the Market Price within this formula, we need to multiply the PE ratio with the Earnings Per Share. The formula now looks like this: MP=PE*EPS.  With the information given, we can calculate Earnings Per Share as $2.50 ($500,000 Net Income divided by 200,000 shares).  Also given in the information is the PE ratio of 8.  We are now able to calculate the Market Price using our isolated formula.  The Market Price is 8 (PE) * $2.50 (EPS) which equals $20.00.  With a Market Price of $20 per share and the investor has 100 shares, their investment value is $2,000 ($20 Market Price per share*100 shares).  Hope this explanation helps!   

------------------------------
Lori Klay
Senior Accountant
Indianapolis, IN
United States
------------------------------

Original Message:
Sent: 12-28-2020 12:27 PM
From: Tayba Al-Mehdar
Subject: CMA part 2 help answer q

why do they multiply by the P/E to get the values of shares?

A corporation has 200,000 shares of common stock outstanding. Net income for the recently ended fiscal year was $500,000, and the stock has a price-earnings ratio of eight. The board of directors has just declared a three-for-two stock split. For an investor who owns 100 shares of stock before the split, the approximate value (rounded to the nearest dollar) of the investment in the corporation's stock immediately after the split is

A.	$3,000
B.	$2,000
	Answer (B) is correct. EPS equals $2.50 ($500,000 NI ÷ 200,000 pre-split shares). Thus, 100 shares had a value of $2,000 (100 shares × $2.50 EPS × 8 P/E ratio) before the split. This value is unchanged by the stock split. Although the stockholder has more shares, the total value of the investment is the same.
C.	$250
D.	$1,333

------------------------------
Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------