Question

e−Bay Inc. provides the following information for the year​ 2015: Net income ​$250,000 Market price per share of common stock ​$50 per share Dividends paid ​$180,000 Common stock outstanding at Jan.​ 1, 2015 ​150,000 shares Common stock outstanding at Dec.​ 31, 2015 ​200,000 shares The company has no preferred stock outstanding. Calculate the​ price/earnings ratio of common stock.

Answer 1

Answer:

34.96 times

Explanation

Calculation for the​ price/earnings ratio of common stock

First step is to find the earnings per share using this formula

Earnings per share =Net income/Average number of common shares outstanding

Let plug in the formula

Earnings per share=$250,000/( 150,000 shares +200,000 shares/2)

Earnings per share=$250,000/(350,000 shares/2)

Earnings per share=$250,000/175,000 shares

Earnings per share=$1.43

Last step is to Calculate the​ price/earnings ratio of common stock using this formula

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

Let plug in the formula

Price/earnings ratio of common stock=​$50 per share/$1.43

Price/earnings ratio of common stock=34.96 times

Therefore the​ price/earnings ratio of common stock will be 34.96 times