Question

A company reported net income of $6 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $5. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. The Price/Earnings Ratio is approximately:

a. $0.40.b. $1.76.c. $1.86.d. $2.00.

Answer 1

The correct answer is $2.5, but it is not included in the option.

Step-by-step explanation:

Earning per share (EPS) = Net income / Average number of common shares outstanding = $6,000,000 / 3,000,000 = $2 per share

Common stock market price per share (MPS) = $5

Price/Earnings Ratio = MPS / EPS = $5 / $2 = $2.5

The correct answer is $2.5.