Question

richards corporation had net income of $170,352 and paid dividends to common stockholders of $40,000. it had 50,700 shares of common stock outstanding during the entire year. richards corporation's common stock is selling for $50 per share. the price-earnings ratio is

Answer 1

To calculate the price-earnings ratio for Richards Corporation, dividends are subtracted from net income to determine EPS, and then the stock price is divided by EPS to find the ratio, resulting in approximately 19.46.

Step-by-step explanation:

The question asks to calculate the price-earnings ratio for Richards Corporation. To find this ratio, we first need to calculate the earnings per share (EPS). The EPS is calculated by subtracting dividends paid on common stock from the net income and then dividing the result by the number of common shares outstanding.

In this case, Richards Corporation had a net income of $170,352 and paid $40,000 in dividends. With 50,700 shares outstanding, the EPS would be ($170,352 - $40,000) / 50,700 = $2.57 per share.

Having the EPS, the price-earnings ratio is then calculated by dividing the current market price per share by the EPS. Therefore, with a stock price of $50 per share, the price-earnings ratio would be $50 / $2.57 = approximately 19.46.

The price-earnings ratio is an indicator of the market's expectations of a company's future earnings growth and is often used by investors to compare the relative value of companies' shares.