Huck Finn is thinking about purchasing some stock in Mississippi Mining Company (MMC). Huck uses the price/earnings ratio technique when purchasing stock. MMC stock is currently selling for $100 per share. MMC is expected to generate a profit of $10 per share this year. The industry averages a P/E of 9.5. Huck considers MMC to be approximately equal to other companies in its industry.

Question

Breanna Browning

Business

1 May, 16:56

Huck Finn is thinking about purchasing some stock in Mississippi Mining Company (MMC). Huck uses the price/earnings ratio technique when purchasing stock. MMC stock is currently selling for $100 per share. MMC is expected to generate a profit of $10 per share this year. The industry averages a P/E of 9.5. Huck considers MMC to be approximately equal to other companies in its industry.

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Answers (1)

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Francesca Boyd · Answer 1

Profit earning ratio of MMC = 10%

Explanation:

Given:

Current stock price = $100

Yearly profit on each share = $10

Profit earning ratio (P/E ratio) = ?

Computation of profit earning ratio:

Profit earning ratio (P/E ratio) = Current stock price / Yearly profit on each share

Profit earning ratio (P/E ratio) = $100 / $10

Profit earning ratio (P/E ratio) = 10

It is computed that MMC's Profit earning ratio is nearer to the industry averages P/E ratio so, the investor can wait for some time to purchase this stock.