(Solution Download) The price to earnings P E ratio is an after tax metric

The price to earnings (P/E) ratio is an after-tax metric reflecting growth potential of the common stock of a corporation. P is the selling price (per share) of the common stock, and £ is the after-tax earnings per year of a share of stock. A high P/E ratio, for example, indicates that a firm is in a high-growth industry (such as biotechnology) and that annual earnings are not as important to investors as the growth rate of the price of common stock is. Because a corporation can be assumed to have an indefinitely long life, the P/E ratio can be likened to the (P/A, i %, N) factor when N approaches infinity. For a certain transportation company, the P/E ratio is 12. What is the implied 1RR for this relatively stable company?


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