Question 1

a) Market price per share = Earnings per share x P/E ratio

Earnings per share = Net profit after tax / No. of ordinary shares

= 3400000/600000

= $5.67

Value of business = earnings * P/E ratio

Valuation per share = Valuation / Number of equity shares

Company 2019 2020 2021

P LTD 6.8 7.6 8.4
Q LTD 7.8 7.1 8.1
R LTD 7.4 6.8 7
S LTD 5 5.9 6.1
Total 27 27.4 29.6
Companies 4 4 4
Average P/E ratio for 6.75 6.85 7.4
each company
Total Average P/E ratio 21    
for the industry
Number of years 3    
Average industry P/E 7    
ratio
Earnings $ 3400000    
Value of business $ 23800000    
Number of shares 600000    
Value per share $ 39.67    
Question 2

b) Capital markets are markets for trading in long-term finance, in the form of long-term
financial instruments such as equities and corporate bonds. Capital markets include the
stock market and the bond market. They help people with ideas become entrepreneurs
and help small businesses grow into big companies. They also give firms opportunities to
save and invest for our futures (Ehrhardt and Brigham, 2011). They act in linking
investors and savers. Facilitates the movement of capital to be used more profitability and
productively to boost the national income (Levy and Sarnat, 1991). Boosts economic
growth. They may raise share capital. Most new issues of share capital are in the form of
ordinary share capital. Firms that issue ordinary share capital are inviting investors to
take an equity stake in the business, or to increase their existing equity stake. They may
raise debt capital. Long-term debt capital might be raised in the form of loan notes,
corporate bonds, loan notes or convertible bonds. Mobilization of savings to finance long
term investment (McLaney, 2000). Financial capital is money entrepreneurs and
businesses use to buy resources and supplies (Gitman and Zutter, 2012). These are then
used to make products or provide services to buyers. Financial capital is raised through
capital markets in two ways either by selling bonds, which are like loans that the business
will repay at a later date with interest, or by selling stocks, which are sold in exchange for
the partial ownership of the business (Block and Hirt, 1994).

c) Earnings per share = Net profit after tax / No. of ordinary shares
= 12000000/1200000
= $10

Earnings yield = Earnings per share / Market price per share

= 10/120

= 0.0833

= 8.33%

Capitalized earnings = P/E ratio  Total earnings

 (P/E) ratio = Market price per share / Earnings per share
= 120/10

= 12

= 12000000*12

= $144 000 000

References

Block, S.B. and Hirt, G.A. (1994). Foundations of Financial Management. (Sixth Edition).
Boston: Irwin.

Ehrhardt, M.C. and Brigham, E.F. (2011). Financial Management, Theory and Practice.
(Thirteenth Edition). Mason: South-Western Cengage Learning.

Gitman, L. and Zutter, C.J. (2012). Principles of Managerial Finance. (Thirteenth Edition).
Boston: Pearson Education, Inc.

Levy, H. and Sarnat, M. (1991). Capital Investments and Financial Decisions. (FourthEdition).
New York: Prentice Hall.

McLaney, E. J. (2000). Business Finance: Theory and Practice. New York: Prentice Hall.