Question

Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had 50,000 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $35 per share. The price-earnings ratio is a.14 times b.2 times c.5 times d.7 times

Answer 1

Answer:

Option (d) 7 times

Explanation:

Data provided in the question:

Net income = $250,000

Dividends paid to common stockholders = $50,000

Common stock outstanding = 50,000

Selling price of the common stocks = $35

Now,

The price-earnings ratio is calculated as:

⇒ ( Stock price ) ÷ ( Earnings per share )

also,

Earnings per share = ( Net income ) ÷ ( common stock outstanding )

= $250,000 ÷ 50,000

= $5

or

Price-earnings ratio = $35 ÷ $5

or

Price-earnings ratio = 7 times

Option (d) 7 times