Question

The Crestar Company reported net income of $112,000 on 20,000 average outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $95. What is this company's current price-earnings ratio?

Answer 1

Answer:

Price earnings ratio = 19 times.

Explanation:

Price earning ratio is calculated as for the common equity, as the earnings on preference share is fixed.

Accordingly, the earnings for equity = Net income - preference dividend = $112,000 - $12,000 = $100,000

Number of shares outstanding = 20,000

Earnings per share = $100,000/20,000 = $5 per share.

Selling price of the share = $95

Thus, price earnings ratio = $95/$5 = 19 times.

This reflects that the 19 times of earnings is the price of share.