"What is the price-earnings ratio? (Brealey and Myers use this year’s stock price divided by next year’s earnings. In practice, stock analysts use the current stock price divided by earnings over the past year. Use the formula in the textbook)"

Just wanted to check- do you want the price-earnings ratio (P0/EPS1) or the earnings-price ratio (EPS1/P0)- cause in your description above you ask for the price-earnings ratio, but earlier in this board you ask for the earnings-price ratio:

"[NEAS: Use the Brealey-Myers formula of EPS1 / P0.  In fact, the price is at a given date and the earnings are over a full year, so we can't match subscripts.  The textbook formula says "earnings from time 0 to time 1 divided by price at time 0."]"

So I just wanted to verify which you are looking for.  Thanks

[NEAS: Use either one; they both demonstrate that you understand the material.]

I'd just like to confirm that when the homework question states: "have earnings next year of $4 per share", it is in fact EPS1? because it was earned from time 0 (now) until the end of next year (year 1)? Thanks!

[NEAS: Yes]

[NEAS: Use the Brealey-Myers formula of EPS1 / P0.  In fact, the price is at a given date and the earnings are over a full year, so we can't match subscripts.  The textbook formula says "earnings from time 0 to time 1 divided by price at time 0."]

I aggree with the last poster that p.72 of shows earnings-price ratio as EPS1/Po. So answer is $40/$4 = $10?

 

p. 72 of Brealey text says Earnings-Price ratio is EPS₁/P₀.  Why did the writers re-define the reciprocal (Price-Earnings ratio) of this to be P₀/EPS₀?  Should we always assume this definition, and know that EPS₀ = EPS₁/(1+g)?

Jacob: One candidate states that the earnings per share in time t+1 is the earnings per share in time t multiplied by the dividend growth rate: EPS(t+1) = EPS(t) × (1 + g). Another candidate asks if this is always true.

Rachel: The dividend is the earnings per share times the payout ratio. The formula is correct as long as the payout ratio does not change.

Jacob: Does the payout ratio normally change over time?

Rachel: As firms mature, the payout ratio normally increases. Brealey and Myers have a section on estimating firm values with a changing payout ratio, but that section is not on the syllabus for this course.

so you're saying EPS0 = EPS1/(1+g)?

Is this formual stated somewhere in the book or how did you come to that conclusion?

You only need to divide Po (stock price) over this year earnings (EPS).  You calculated the stock price in the previous question (Stock price=40).  The next year earnings is 4.  But you need this year's right?.  We also calculated that g (the growth rate) is 12%.  So you can use this to calculate this year's earnings:

This year's earnings=4/(1.12)=3.57.

So finally, the price-earnings ratio is 40/3.57=11.20

The question asks us to find the P/E ratio, but they don't give us this year's earnings (although we can figure out the current price based on the info given). Am I missing something?