Question

In: Accounting

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

A company reports the following:

Net income $250,000

Preferred dividends $15,000

Shares of common stock outstanding 20,000

Market price per share of common stock $35.25

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

The following formulae can be used to calculate the price-earnings ratio (P/E ratio) and the company's earnings per share (EPS) on common stock:

(a) Earnings per Share (EPS) = (Net Income - Preferred Dividends) / Shares of Common Stock Outstanding

(b) Price-Earnings Ratio (P/E ratio) = Market Price per Share of Common Stock / Earnings per Share

Given: Net income: $250,000 Preferred dividends: $15,000 Shares of common stock outstanding: 20,000 Market price per share of common stock: $35.25

(a) Earnings per Share (EPS): EPS = (Net Income - Preferred Dividends) / Shares of Common Stock Outstanding = ($250,000 - $15,000) / 20,000 = $235,000 / 20,000 = $11.75

Therefore, the earnings per share on common stock is $11.75.

(b) Price-Earnings Ratio (P/E ratio): P/E ratio = Market Price per Share of Common Stock / Earnings per Share = $35.25 / $11.75 = 3

Therefore, the price-earnings ratio is 3 (rounded to one decimal place).

Therefore, the earnings per share on common stock is $11.75.

Therefore, the price-earnings ratio is 3 (rounded to one decimal place).

balaji rao answered 1 year ago
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