EPS and Share Price Example
Market
price of a share goes up with increase in EPS, similarly market price fall with
a decrease in share price, this relationship can be explained as with following
example
A
company has following information
EPS for
2010 = 20
EPS for
2011 = 25
P/E
Ration of the company is 20 for two years (both years)
Calculate
the market share price?
Solution
Formula
for calculating Market price is
Market
Price = P/E Ratio x EPS
Market
Price = 20 x 20 = 400 (2010)
Market
Price = 25 x 20 = 500 (2011)
it is
therefore important for the company to maintain and EPS , otherwise , it market
value will fall.
