Question

In: Accounting

a. Determine the company’s earnings per share on common stock.(b)b. Determine the company’s price-earnings ratio. Round to one decimal place.

A company reports the following:

Net income $185,000

Preferred dividends $25,000

Shares of common stock outstanding 100,000

Market price per share of common stock $20

a. Determine the company’s earnings per share on common stock.

b. Determine the company’s price-earnings ratio. Round to one decimal place. 

Solutions

Expert Solution

Financial Ratios : The criteria used to assess a company's liquidity, capabilities, profitability, and overall performance are called financial ratios.

Earnings per share : Earnings per share refers to the portion of profit that each share of stock generates for a certain shareholder.

Earnings per share = Net income  - Preferred Dividends  / Weighted Average no.of.common shares outstanding

=$185,000 - $25,000 / 100,000

=$60,000 / 100,000

=$1.60

Price / earnings ratio : The price-to-earnings ratio is used to assess a company's profitability. P/E is the abbreviation for this ratio.

Price / earnings ratio = Market price per share of common stock  / Earnings per share

= $20 / $1.60

= $12.5 times 

 

 

 

 

 

(a)Therefore, the calculated earnings per share are $1.60

(b)Therefore, the calculated price earnings ratio is 12.5 times

balaji rao answered 2 years ago
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