Question

​Ketchen, Inc. provides the following information for​ 2018: Net income ​$290,000 Market price per share of common stock ​$70 per share Dividends paid ​$190,000 Common stock outstanding at Jan.​ 1, 2018 ​150,000 shares Common stock outstanding at Dec.​ 31, 2018 ​240,000 shares The company has no preferred stock outstanding. Calculate the​ price/earnings ratio of common stock.​

Answer 1

Answer:

Earnings per share = Net income/No of ordinary shares outstanding at the end of the year

Earnings per share = $290,000/240,000 shares

Earnings per share = $1.21

Therefore, Price-earnings ratio = Market price per share/Earnings per share

                  Price-earnings ratio = $70/1.21

                  Price-earnings ratio = 57.85

Explanation: First and foremost, there is need to calculate earnings per share by considering the net income and then divide it by the number of common stocks outstanding at the end of the year. Price-earnings ratio is obtained by dividing the market price per share by earnings per share.