Question

Financial information for Forever 18 includes the following selected data: ($ in millions except share data) 2021 2020 Net income $ 182 $ 164 Dividends on preferred stock $ 34 $ 25 Average shares outstanding (in millions) 200 200 Stock price $ 11.27 $ 10.22 2-a. Calculate the price-earnings ratio in 2020 and 2021.

Answer 1

Answer:

P/E ratio in 2020 is 14.7

P/E ratio in 2021 is 15.23

Explanation:

Price-earning (P/E) ratio = Price per Share/ Earning per Share

The earning after dividends on preferred stock in 2021 is $148 = Net income $182 - Dividends on preferred stock $34

Then earning per share in 2021 is $0.74 = $148/ 200  

P/E ratio in 2021 is 15.23 = $11.27/$0.74

Repeat calculation for 2020, then:

The earning after dividends on preferred stock in 2020 is $139 = Net income $164 - Dividends on preferred stock $25

Then earning per share in 2021 is $0.695 = $139/ 200  

P/E ratio in 2020 is 14.7 = $10.22/$0.695