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

Sunrise Textiles Ltd has 8,00,000 equity shares outstanding. It reports a net profit after tax of Rs 40,00,000 and pays preference dividend of Rs 4,00,000. The market price per share is Rs 90. What is the Price-Earnings ratio, and what is the earnings per share (EPS)?

EPS is Rs 4.50 and P/E is 20 times. Earnings available to equity shareholders are Rs 36,00,000 after deducting the preference dividend from profit, which divided by 8,00,000 shares gives Rs 4.50. Dividing the market price Rs 90 by this EPS gives 20 times.

  1. AEPS Rs 4.50; P/E 20 timesCorrect
  2. BEPS Rs 5.00; P/E 18 times
  3. CEPS Rs 4.50; P/E 18 times
  4. DEPS Rs 5.00; P/E 20 times

Explanation

Earnings for equity holders = 40,00,000 - 4,00,000 = Rs 36,00,000. EPS = 36,00,000 / 8,00,000 = Rs 4.50. P/E = 90 / 4.50 = 20 times. Using Rs 5.00 ignores the preference dividend (40,00,000/8,00,000), which is the key error.

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