Question
In: Accounting
The balance sheets at the end of each of the first two years of operations indicate...
The balance sheets at the end of each of the first two years of
operations indicate the following:
| 2017 | 2016 | ||
| Total current assets | $600,000 | $560,000 | |
| Total investments | 60,000 | 40,000 | |
| Total property, plant, and equipment | 900,000 | 700,000 | |
| Total current liabilities | 125,000 | 80,000 | |
| Total long-term liabilities | 350,000 | 250,000 | |
| Preferred 9% stock, $100 par | 100,000 | 100,000 | |
| Common stock, $10 par | 600,000 | 600,000 | |
| Paid-in capital in excess of par--common stock | 60,000 | 60,000 | |
| Retained earnings | 325,000 | 210,000 |
Based on the above information, if net income is $130,000 and
interest expense is $40,000 for 2017, and the market price is $40,
what is the price-earnings ratio on common stock (round to one
decimal place)?
Solutions
Expert Solution
The following is the formula for price earning ratio
Price earning ratio = market price per share / Earnings per share
Market price per share is $40
Earnings per share = income available to common share holders / weighted average number of common shares outstanding
Preferred stock dividend = 100,000 × 9% = $9,000
Income available to common share holders
= net income - preference dividend
Income available to common share holders
= 130,000 - 9,000 = $121,000
$121,000 is income available to common share holders.
Weighted average number of common shares
= 600,000 / 10 = 60,000 common shares
Earnings per share = 121,000 / 60,000 = $2.02
$2.02 is the earnings per share
PRICE EARNINGS RATIO
Price earnings ratio = market price per share / earnings per share
Price earnings ratio = 40 / 2.02 = 19.84
19.84 is price earnings ratio.
Weighted average number of common shares is calculated by dividing total face value of common shares $600,000 by its par value $10. $40,000 interest expense not required for the calculations.
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ekkarill92 answered 11 months agoRelated Solutions
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