Question

Lark had net income for 2018 of $105,000. Lark has 33,000 shares of common stock outstanding at the beginning of the year and 48,000 shares of common stock outstanding at the end of the year. There were 5,000 shares of preferred stock outstanding all year. During 2018, Lark declared and paid preferred dividends of $30,000. On December 31, 2018, the market price of Lark's common stock is $32.00 per share and the market price of its preferred stock is $57.00 per share. What is Lark's price/earnings ratio at December 31, 2018? (Round any intermediate calculations and your final answer to the nearest cent.)

Answer 1

Answer:

Price Earnings Ratio = 20.48

Explanation:

Price Earnings Ratio = Price/Earnings per share

Here Price is of common stock

In the given case = $32

Earnings per share are calculated at year end for common stock.

Earnings for common stock = Net income - Dividend to preference shares = $105,000 - $30,000 = $75,000

Earnings per share = $75,000/48,000 shares = $1.5625

Price Earnings Ratio = $\frac{32}{1.5625}$ = 20.48

Note: There is no relevance of share price of preference shares, also no relevance on opening number of shares of equity as PE Ratio is calculated on closing number of shares and on the date and not for the period that we will consider the average.

Price Earnings Ratio = 20.48