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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Meera Industries has equity share capital of Rs 10,00,000 (Rs 10 shares), 10% preference share capital of Rs 2,00,000, and profit after tax of Rs 3,20,000. Reserves are Rs 4,00,000. The market price per share is Rs 24. What is the price earnings ratio?

The price earnings ratio is 8 times. Preference dividend of Rs 20,000 is deducted from profit after tax of Rs 3,20,000, leaving Rs 3,00,000 for 1,00,000 equity shares, so EPS is Rs 3. Dividing market price Rs 24 by EPS Rs 3 gives 8 times.

  1. A7.5 timesCorrect
  2. B8 times
  3. C6 times
  4. D9 times

Explanation

Preference dividend = 10% of 2,00,000 = 20,000. Earnings for equity = 3,20,000 - 20,000 = 3,00,000. Shares = 1,00,000, so EPS = Rs 3. P/E = 24/3 = 8 times. Ignoring the preference dividend gives EPS 3.2 and P/E 7.5, which is the wrong option.

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