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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 1 year ago
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