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20 September, 18:00

Net income $ 209,600 Preferred stock outstanding, 12% cumulative $ 80,000 Market price per share of common stock $ 24.00 Total Stockholders' Equity $ 1,240,000 Average number of common shares outstanding 100,000 shares Number of common shares outstanding at end of the accounting period 120,000 shares Dividends per share on common stock $ 0.50 per share.

Based on this information the company's price-earnings ratio:

(a). 5 to 1

(b). 12 to 1

(c). 2 to 1

(d). 10 to 1

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Answers (1)
  1. 20 September, 20:42
    0
    Option (B) is correct.

    Explanation:

    Earning available for equity stockholders:

    = Net Income - Preferred stock dividend

    = $209,600 - ($80,000 * 12%)

    = $209,600 - $9,600

    = $200,000

    Earning Per Share:

    = Earning available for equity stockholders : Average number of common shares outstanding

    = $200,000 : 100,000

    = $2

    Price-Earning Ratio = Price of Share : Earning Per Share

    = $24 : $2

    = 12 Times or 12:1
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