Question

A company has net income of $870,000; its weighted-average common shares outstanding are 174,000. Its dividend per share is $1.25, its market price per share is $104, and its book value per share is $100.00. Its price-earnings ratio equals

Answer 1

Price earnings ratio is $20.8

Step-by-step explanation:

Income available to common shareholders ;

= Net income - Preference dividend

= $870,000 - $0

= $870,000

Weighted average number of shares = 174,000 shares

Earnings per share (EPS) = Income due to common share holders ÷ Weighted average number of shares

= $870,000 ÷ 174,000

= $5 per share

Since Market price per share (MPS) = $104, therefore;

Price - Earnings Ratio = MPS ÷ EPS

= $104 ÷ $5

= $20.8