Camp Company had total earnings of $600 million in 2013,out of which it retained 20 percent for future investments.In 2013,its stock featured a dividend yield of 4 percent and 100 million shares were outstanding.The price-earnings ratio for Camp Company stock was
A)5.
B)150.
C)20.
D)25.

Question

Quizplus · Accepted Answer

20% of $600 million is $120 million, which was retained for future investment. The total amount of dividends paid out in 2013 is 4% of 100 million shares outstanding, which is $4 million. 
To find the price-earnings ratio, we first need to find the earnings per share (EPS). 
EPS = (Total earnings - Dividends paid out) / Number of shares outstanding
EPS = ($600 million - $120 million - $4 million) / 100 million = $4.76 
Price-earnings ratio = Price per share / Earnings per share 
We do not have the price per share, but we can use the dividend yield to estimate it: 
Dividend yield = Dividends paid out / Price per share * 100%
4% = $4 million / Price per share * 100%
Price per share = $100 million / 4% = $2.5 billion 
Price-earnings ratio = $2.5 billion / ($600 million - $120 million - $4 million) / 100 million = 20

Camp Company Had Total Earnings of $600 Million in 2013,out