Question

Tronnes Corporation's net income last year was $1,750,000. The dividend on common stock was $2.60 per share and the dividend on preferred stock was $2.50 per share. The market price of common stock at the end of the year was $57.70 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to: A. 17.85 B. 11.54 C. 24.04 D. 9.89

Answer 1

Answer:

• The price-earnings ratio is closest to:

B. 11.54

Explanation:

To find the Price-Earning Ratio first, it's necessary to deduct from the Net Income the part corresponding to Preferred Stock,

which is , $1,750,000 - (100,000*2,5= $250,000) = $1,500,000

Then we calculte the Earning/Share Ratio : $1,500,000/300,000 = 5

Finally with the Market Price of shares, we can calculate the Price Earnings Ratio ; $57,70 / $5 =  11,54

Shares of Common stock outstanding    300.000   780.000  

Shares of Preferred stock outstanding    100.000   250.000  

NET INCOME Available   1.500.000  

The market price    57,70  

Price–Earnings Ratio   11,54  

Earnings/Share Ratio   5,00  

NET INCOME  $ 1.750.000