Bountiful Tractors has a share price of $60,retained earnings of $2 per share,and a dividend yield of 2 percent.What is Bountiful Tractor's price-earnings ratio?
A)23.1
B)18.75
C)15
D)30

Question

Quizplus · Accepted Answer

Price-earnings ratio is calculated by dividing the current market price per share by earnings per share (EPS). EPS is calculated by subtracting dividends per share from retained earnings per share.

Given:
Market price per share (P) = $60
Retained earnings per share (E) = $2
Dividend yield (D) = 2% = 0.02

Dividends per share (DPS) = D x P = 0.02 x $60 = $1.2

EPS = E - DPS = $2 - $1.2 = $0.8

Price-earnings ratio = P/EPS = $60/$0.8 = 75/4 = 18.75.

Therefore, the answer is B) 18.75.

Bountiful Tractors Has a Share Price of $60,retained Earnings of $2