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- Prof. V R Shahane.
1. Ninad approached PG-B for Equity Capital for Company N. • Each one offers Rs.1 lakhs as equity capital. • So N starts with equity capital of Rs.50 lakhs 10,000 with 50 shareholders holding ______ equity shares, each of face value Rs. 10 and N has 5 lakhs equity shares in all. ______
2. N borrows from Institutional Lenders Rs. 100 2:1 lakhs at DER (Debt Equity Ratio) of ____ . So N now has TCE of Rs . ____ lakhs. 150
3. After stable operations N sales are Rs. 450 3:1 Lakhs. With a Capital Turnover Ratio of ____ . The Net profit is Rs. 60 lakhs.
4. Hence EPS (Earnings Per Share ) of N is ___. 12
Earnings Per Share = Net Profit / Number of Equity Shares .
Now Ninad lists the company on BSE/NSE and the shares quote at Rs.120/share.
5. So N is Trading at PE of ___. 10
PE Ratio = Current Market Price/ Earning Per Share
6. Now Abhijeet is thinking about N’s profit next year will be Rs. 100 lakhs. Should I purchase more equity shares from stock exchange ? Reason ? Next Year EPS = 20 (100 lakhs / 5 lakhs). Last Years PE was 10 ,So the N shares will 20 10 200 trade at ___ X ___ = _____. 7. Hely thinks opposite. She thinks profit will fall to Rs. 40 lakhs. therefore EPS = 8 ( 40 lakhs / 5 lakhs). So why not sell N’s shares to Abhijeet and invest the receipt into FD @ 10%.
• So trade takes place. Actually, Abhijeet is proved right. For him N created wealth. His initial Rs. 1lakhs 2 lakhs is now Rs. _______ .
Now important to see how EPS/PE/Market Price /Profits worked.
1) Abhijeet acted to acquire more shares and many like him did too. 2) So the price of N shares moved upto Rs.200 before the profit results actually declared. At that point the PE was_______. 16.667
From this example we can conclude that
PE is all about expectation of Future performance. We invest in high PE today expecting tomorrows EPS will be high.
Earnings Per Share = Net Profit / Number of Equity Shares . PE Ratio = Current Market Price/ Earning Per Share. PE is all about expectation of Future performance.