P/E Ratio (Price Earning Ratio)

P/E Ratio Formula: $\text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings Per Share (EPS)}}$

Calculation of Number of Equity Shares:

Number of Equity Shares = $\frac{\text{Equity Share Capital}}{\text{Face Value per Share}}$ = $\frac{4,00,000}{10}$ = 40,000 shares

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Calculation of Earnings Available to Equity Shareholders:

Preference Dividend = 12% of Rs. 1,00,000 = Rs. 12,000

Earnings for Equity Shareholders = Net Profit After Tax - Preference Dividend

= Rs. 1,50,000 - Rs. 12,000 = Rs. 1,38,000

(Preference dividend must be deducted as equity shareholders have residual claim on profits)

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Calculation of Earnings Per Share (EPS):

EPS = $\frac{\text{Earnings for Equity Shareholders}}{\text{Number of Equity Shares}}$ = $\frac{1,38,000}{40,000}$ = Rs. 3.45

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Calculation of P/E Ratio:

P/E Ratio = $\frac{34}{3.45}$ = 9.86 times

The P/E ratio of 9.86 indicates that investors are willing to pay Rs. 9.86 for every rupee of earnings generated by the company.