# P/E question

The following info is given in the question: Current market price =\$25 Basic EPS for most recent year=\$2 Non-recurring earnings=\$0.35 (included in \$2 EPS) It is also given that the company has issued securities that, if exercised would increase company’s shares outstanding by 5%. Determine trailing P/E ratio ? A. 11.9 B. 13.2 C. 14.4 D. 15.9

This is how I approached the problem and got it wrong. P/E ? E = 2-0.35/1.05=1.57 P=\$25, but if options are exercised —> new price will be 25/1.05=23.8 (to keep total equity at same level) ==> P/E=23.8/1.57 = 15.15

Please ignore, the question says stock options, and not STOCK SPLITS.

Here it is my approah: EPS=2-0.35=1.65 P/E=25/1.65=15.15 Considering: EPS=net Income / weight n, share oustanding 15.15=1.65 / weight n, share oustanding therefore weight n, share oustanding= 0.10891 Now, considering the dilution effect: weight n, share oustanding= 0.10891 + 5%= 0.11436 As a result: Diluited EPS= 1.65/ 0.11436 = 14.4

25 /{2-0.35/1.05} = 15.9 = D

Thunder can we know the answer?

D is correct ans Strange - we need to adjust for price if there was a stock split. Excersing an option will not have any impact on the price. Any comments ?

i think answer is (D) 25 /[(2-0.35)*.95] = 15.949

thunderanalyst Wrote: ------------------------------------------------------- > D is correct ans > > Strange - we need to adjust for price if there was > a stock split. Excersing an option will not have > any impact on the price. > Any comments ? I just adjusted the denominator (n.of shares). The numerator is the same as rahulv

If this would have been a stock split, you would have seen a 100% or more inrease in shares. These are either convertible debt or options.

map1 Wrote: ------------------------------------------------------- > If this would have been a stock split, you would > have seen a 100% or more inrease in shares. These > are either convertible debt or options. Hey map! Good you are back! So what you think is the right one?

I think you all got it right the first time:) Adjust for the non-recurring earnings, then adjust EPS for the increase in the number of shares, and then calculate P/E. At least this is how I would have done it, although at a first look I was getting nuts looking for the growth rate:))

map1 Wrote: ------------------------------------------------------- > I think you all got it right the first time:) > Adjust for the non-recurring earnings, then adjust > EPS for the increase in the number of shares, and > then calculate P/E. At least this is how I would > have done it, although at a first look I was > getting nuts looking for the growth rate:)) So…your answer is?

25/[(2-.35)/1.05]=15.9=D

I got D, too. Just recall to back out the non-recurring items. Those won’t prop up EPS next year, so sell side back it out

I actually got this one!!! Basic EPS is used for trailing right? If you adjusted for the increase in shares, that would be diluted, right?

amberpower Wrote: ------------------------------------------------------- > I actually got this one!!! Basic EPS is used for > trailing right? If you adjusted for the increase > in shares, that would be diluted, right? you can use BASIC EPS for forward PEs, too. The change in shares out. you only bother with if it asks for forward PE