Net income $185,000
Preferred dividends $25,000
Shares of common stock outstanding 100,000
Market price per share of common stock $20
a. Determine the company’s earnings per share on common stock.
b. Determine the company’s price-earnings ratio.
Answer:
a. Earnings per Share
on Common Stock =
Shares of Common Stock Outstanding
Earnings per Share = ($185,000 – $25,000) ÷ $100,000
on Common Stock
Earnings per Share =
on Common Stock
$1.60
b. Price-Earnings Ratio = M
arket Price per Share of Common Stock
Earnings per Share on Common Stock
Price-Earnings Ratio =
Price-Earnings Ratio =
$20.00 ÷ $1.60
12.5