A P/E ratio may be established and used as a method of valuing the shares of an
unquoted company, but it is a facility to read too much significance into the P/E ratio or
quoted companies. The EPS is determined by the success (or otherwise) of a company's
management, and the share price on the market is determined by many factors
(dividends, growth prospects, government policy, the economic situation e.t.c.) of which
the EPS is only one. The P/E ratio is therefore an interesting and useful measure of
comparison, but it does not of itself possess any inherent significance which is used by
investors to fix share prices.
marto answered the question on February 11, 2019 at 11:19
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Date posted: February 11, 2019. Answers (1)
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1. Selling price per unit of product – Sh.1,000
2. Variable cost per unit of product – Sh.850
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Advise Dawamu Ltd. on whether or not to extend the credit period offered to
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Date posted: February 11, 2019. Answers (1)
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Swaleh Ltd. has been in operation for the last eight years. The company is all equity
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market price per share is Sh.8.40, which is in line with the price/earnings (P/E) ratio in
the industry of 6.00. The company has been consistent in paying a dividend of Sh.1.25
per share during the last five years of its operations, and indications are that the current
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The management of Swaleh Ltd. is contemplating the implementation of a new project
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Alternative A
To raise the Sh.10 million through a rights issue. Management is of the opinion that a
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Alternative B
To obtain the Sh.10 million through a loan. Interest is to be paid at a rate of 12% per
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The project is expected to increase annual operating income by Sh.5.6 million in the
foreseeable future.
Irrespective of the alternative selected in financing the new project, corporation tax is
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Required:
(i) Determine the current level of earnings per share (EPS) and the operating
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(ii) If Alternative A is selected, determine the number of shares in the rights issue
and the theoretical ex-rights price.
(iii) Calculate the expected earnings per share (EPS) for each alternative, and advise
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Date posted: February 11, 2019. Answers (1)
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Date posted: February 11, 2019. Answers (1)