Question

Richards Corporation had net income of $275,132 and paid dividends to common stockholders of $48,300. It had 57,200 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $59 per share. The price-earnings ratio (rounded to two decimal places) is

Answer 1

The Price-earnings ratio is 14.88 (to two decimal places)

Step-by-step explanation:

The Price-earnings ratio (P/E ratio) is a measure of the relationship between a company's stock price and its earning per share of issued stock. Mathematically, P/E ratio is calculated by dividing a company's current stock price by its earnings per share:

P/E ratio = current stock price ÷ earnings per share

current stock price = $59 per share

Earning per share = ???

Next we are going to calculate the earnings per share (EPS) by using the following formula:

EPS = (net income - dividend paid) ÷ (number of shares outstanding)

EPS = (275,132 - 48,300) ÷ (57,200)

EPS = 3.966

∴ P/E ratio = current stock price ÷ Earning per share (EPS)

P/E ratio = 59 ÷ 3.966 = 14.876 = 14.88 (to two decimal places)