Question

A firm has net income of $38,000, preferred stock dividends of $10,000, and common stock dividends of $8,000. The firm has 10,000 shares of common stock outstanding that sells for $46 a share. What is the price-earnings (PE) ratio?

Answer 1

16.43 times

Step-by-step explanation:

The computation of the price-earnings ratio is shown below:

Price-earnings ratio = (Market price per share) ÷ (Earning per share)

where,

Earning per share is

= (Net income - preferred stock dividends) ÷ (common stock outstanding)

= ($38,000 - $10,000) ÷ (10,000 shares)

= ($28,000) ÷ (10,000 shares)

= $2.8 per share

So, the price earning ratio would be

= ($46) ÷ ($2.8)

= 16.43 times