Question

Moonglow Specialties, Inc., is currently trading at $20 per share. Recently, the company reported net income of $1 million. The company is capitalized with 200,000 common shares and $5 million of 20-year debentures with a coupon of 4%. Given the data, Moonglow's price-to-earnings (P/E) ratio is closest to

Answer 1

P/E ratio = 4

Step-by-step explanation:

the price to earnings ratio formula:

P/E ratio = stock's market price / earnings per share

earnings per share (EPS) = (net income - preferred dividends) / average outstanding shares

net income = $1,000,000

preferred dividends = $0

average outstanding shares = 200,000

EPS = $1,000,000 / 200,000 = $5

P/E ratio = $20 / $5 = 4