3BM070 Strategic Corporate Finance ASSIGNMENT 2 Essay

3BM070 Strategic Corporate Finance ASSIGNMENT 2 - Essay Example The ratio is seen to be as high as 30% (Damodaran, 2012). a) Whether making investments in the shares of BP is profitable or not, has been analysed on the basis of the above calculations in respect to p/e ratio and the share price value calculated using the dividend growth model. The p/e ratio aids investors to understand the market prospects of a given stock. A higher p/e ratio is generally considered to be better as it results out of higher earnings and market value existing for a share. It is also considered that firms having a higher p/e ratio is likely to give more dividends (Bakshi and Chen, 2005). The ratio helps investors to decide upon the price at which shares must be purchased based on the evaluation of its earnings. The ratio therefore aids in establishing a relationship between earnings and the market value per share. It is extremely essential that the ratio is studied by investors based on industry average and previous year’s values. The ratio can be interpreted wrongly if not suitably compared with the p/e ratios of previous years and the general ratio existing in the industry (Sharpe, 2002). From the calculations carried out it has been seen that the p/e ratio of BP in the 2013 has been lower than the general industry standards. The industry standards were at 12.8 while the ratio for BP was as low as 6.49%. This indicates that the market value of shares and the EPS values for the year 2013 of BP were lower than the general industry standards. On the other hand, it was seen that the p/e ratio for the year 20014 had risen to 30%. This was identified due to a fall in the earning per share (EPS) values, although the price of shares had experienced lower level of decline. Although a higher p/e ratio is considered to be better, it may be judged wrongly if not compared with the figures of the previous year. In case of BP, although the p/e ratio had risen, the cause behind it was a fall