Question

Earnings per Share and Price-Earnings Ratio

A company reports the following:
Net income
Preferred dividends
Shares of common stock outstanding
Market price per share of common stock
$318,000
$18,000
40,000
$33.00
a. Determine the company's earnings per share on
common stock. Round your answer to the nearest cent.
Use the rounded answer of requirement a for
subsequent requirement, if required.
b. Determine the company's price-earnings ratio. Round
to one decimal place.

Answer 1

a. To determine the earnings per share on common stock, we need to subtract the preferred dividends from the net income and then divide by the number of shares of common stock outstanding:

Net income - Preferred dividends = $318,000 - $18,000 = $300,000

Earnings per share = $300,000 / 40,000 = $7.50 per share

Therefore, the company's earnings per share on common stock is $7.50.

b. The price-earnings ratio is calculated by dividing the market price per share of common stock by the earnings per share:

Price-earnings ratio = Market price per share / Earnings per share

Price-earnings ratio = $33.00 / $7.50

Price-earnings ratio = 4.4

Therefore, the company's price-earnings ratio is 4.4.