Riverton Company Had Earnings Per Share Last Year of $4

Essay

Riverton Company had earnings per share last year of $4.00 and an average share price of
$48.00.Riverton uses the declining balance method of amortizing its capital assets and has not reported any large unusual items in the past few years.They have also reported cash from operations that closely mirror the changes in their net earnings.Silver Ltd is a competitor of Riverton and is trying to determine why its share price seems to be low compared to Riverton's share price.Silver's earnings per share last year were $6.00 and the historical price earnings ratio is currently 8 times.Silver uses the straight-line method for amortizing its capital assets and regularly reports large losses when it sells capital assets.Last year they also reported some gains from selling off a piece of land and from the settlement of a lawsuit.
Required:
A) Calculate the price earnings ratio for Riverton Company.
B) What does Riverton's P/E ratio tell you about the market's expectations for its shares as compared to the market's expectation for Silver Ltd's shares? What does it tell you about the assessment of their respective risks? C) What was the average price of Silver's shares?
D) Why do you think the two companies have different price earnings ratios?