Calculate the company's price earning ratio
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Calculate the company's price earning ratio
![A company reports the following:
- **Net income:** $249,250
- **Preferred dividends:** $18,460
- **Shares of common stock outstanding:** 49,000
- **Market price per share of common stock:** $107.58
Calculate the company's price-earnings ratio. Round your answer to two decimal places.
**Explanation:**
To calculate the price-earnings (P/E) ratio, use the formula:
\[ \text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}} \]
1. **Calculate Earnings Per Share (EPS):**
\[ \text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Shares of Common Stock Outstanding}} \]
\[ \text{EPS} = \frac{249,250 - 18,460}{49,000} \]
2. **Calculate P/E Ratio:**
\[ \text{P/E Ratio} = \frac{107.58}{\text{EPS}} \]
This exercise helps in understanding how to determine the market's valuation of a company's profitability.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb9afb7ec-6132-4cc2-ad37-8ac5ebf1a4cc%2F06c38721-d969-425b-8ceb-f46c7b5a229a%2F637wce_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A company reports the following:
- **Net income:** $249,250
- **Preferred dividends:** $18,460
- **Shares of common stock outstanding:** 49,000
- **Market price per share of common stock:** $107.58
Calculate the company's price-earnings ratio. Round your answer to two decimal places.
**Explanation:**
To calculate the price-earnings (P/E) ratio, use the formula:
\[ \text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}} \]
1. **Calculate Earnings Per Share (EPS):**
\[ \text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Shares of Common Stock Outstanding}} \]
\[ \text{EPS} = \frac{249,250 - 18,460}{49,000} \]
2. **Calculate P/E Ratio:**
\[ \text{P/E Ratio} = \frac{107.58}{\text{EPS}} \]
This exercise helps in understanding how to determine the market's valuation of a company's profitability.
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