The balance sheets at the end of each of the first two years of operations indicate the following: $\begin{array}{lrr}&2017&2018\
\text { Total current assets } & \$ 600,000 & \$ 560,000 \
\text { Total investments } & 60,000 & 40,000 \
\text { Total property, plant, and equipment } & 900,000 & 700,000 \
\text { Total current liabilities } & 125,000 & 80,000\
\text { Total long-term liabilities } & 350,000 & 250,000 \
\text { Preferred } 9 \% \text { stock, } \$ 100 \text { par } & 100,000 & 100,000 \
\text { Common stock, } \$ 10 \text { par } & 600,000 & 600,000 \
\text { Paid-in capital in excess of par-common stock } & 60,000 & 60,000 \
\text { Retained earnings } & 325,000 & 210,000
\end{array}$ ? Based on the above information, if net income is $130,000 and interest expense is $40,000 for 2017, and the market price is $40, what is the price-earnings ratio on common stock (round to one decimal place)?
A) 14.9
B) 19.8
C) 17.3
D) 18.4

Question

Quizplus · Accepted Answer

The price-earnings ratio (P/E ratio) is calculated by dividing the market price per share by the earnings per share (EPS). For 2017, the net income is $130,000. Since there's preferred stock, we need to subtract the preferred dividends from the net income to get the earnings available for common stockholders. The preferred dividends are 9% of $100,000, which is $9,000. So, the earnings available for common stockholders are $130,000 - $9,000 = $121,000. The number of common shares is the common stock divided by the par value, which is $600,000 / $10 = 60,000 shares. Thus, EPS = $121,000 / 60,000 = $2.02. The market price is $40, so the P/E ratio = $40 / $2.02 = 19.8 (rounded to one decimal place).

The Balance Sheets at the End of Each of the First