Question

Richards Corporation had net income of $185,808 and paid dividends to common stockholders of $44,800. It had 55,300 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $68 per share. The price-earnings ratio (rounded to two decimal places) is

Answer 1

The price-earnings ratio is $20.24.

Step-by-step explanation:

Price-to-Earnings ratio is a relative valuation technique used to compare companies performance with its past data and competitors. It tells us about the demand of investors. How much an investor is willing to pay for $1 of company's earning.

This ratio is calculated by taking Price per share and dividing it by Earnings Per Share. Earnings refer to Profit After Taxes, it is the amount which is available to Pay Dividends. So, you have to ignore the dividends here. Just simply take the net income and divide it by outstanding common stock, it will give you Earnings Per Share.

Calculations

P/E ratio = 68 / (185,808 / 55,300) = 68 / 3.36 = $20.24.