Question

KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?

A. 6.65
B. 6.38
C. 7.99
D. 5.12
E. 7.41

Answer 1

The price-earnings ratio of KBJ is calculated by finding the net income using the total assets, total asset turnover, and profit margin, determining the earnings per share, and then dividing the market value per share by the EPS. The correct answer is 6.65, option A.

Step-by-step explanation:

To calculate the price-earnings ratio for KBJ, we need to determine the company's earnings per share (EPS) first. Given that KBJ has a profit margin of 6.2 percent and total assets of $613,000, with a total asset turnover of 1.08, we can calculate the net income by multiplying the total assets by the total asset turnover and then by the profit margin. Following that, the EPS is calculated by dividing the net income by the number of shares outstanding. The price-earnings (P/E) ratio is then found by dividing the market value per share by the EPS.

1. Calculate Total Sales: Total Assets * Total Asset Turnover = $613,000 * 1.08 = $661,640.
2. Calculate Net Income: Total Sales * Profit Margin = $661,640 * 6.2% = $41,021.68.
3. Calculate EPS: Net Income / Number of Shares = $41,021.68 / 21,000 = $1.95342.
4. Calculate P/E Ratio: Market Value per Share / EPS = $13 / $1.95342 = 6.65.

Therefore, the correct answer for the price-earnings ratio is 6.65, which corresponds to option A.