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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Shree Textiles Ltd has 10,00,000 equity shares outstanding. Its net profit after tax is ₹2,50,00,000 and its shares trade at a market price of ₹300 each. The dividend paid is ₹10 per share. What is the firm's Earnings Per Share (EPS) and what is the approximate Price-Earnings ratio?

EPS is net profit after tax divided by shares outstanding, giving ₹25, and the P/E ratio is the market price of ₹300 divided by EPS of ₹25, which is 12 times. Using the dividend per share instead of EPS would wrongly give 30 times.

  1. AEPS ₹25; P/E 12 timesCorrect
  2. BEPS ₹15; P/E 20 times
  3. CEPS ₹25; P/E 30 times
  4. DEPS ₹10; P/E 30 times

Explanation

EPS = 2,50,00,000 / 10,00,000 = ₹25. P/E = market price / EPS = 300 / 25 = 12 times. Check: 12 x 25 = 300. The option with EPS ₹25 and P/E 30 wrongly divides price by dividend per share (300/10 = 30).

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