McDucket, Inc. generates net profit of $592,000 and has a price-book ratio of 5.2. Total assets are $2,320,000 and total liabilities are $1,289,000. The company has 560,000 common stock outstanding. What is the price-to-earnings ratio?
A)9.06
B)9.23
C)10.12
D)10.80
E)11.70

Question

Quizplus · Accepted Answer

The price-to-earnings (P/E) ratio is calculated by dividing the market price per share by the earnings per share (EPS). First, we need to find the book value of equity, which is total assets minus total liabilities: $2,320,000 - $1,289,000 = $1,031,000. The market value of equity can be found by multiplying the book value of equity by the price-book ratio: $1,031,000 * 5.2 = $5,361,200. To find EPS, divide net profit by the number of common stock outstanding: $592,000 / 560,000 = $1.057. Finally, to find the P/E ratio, divide the market value per share by EPS. The market value per share is the market value of equity divided by the number of shares outstanding: $5,361,200 / 560,000 = $9.573. So, the P/E ratio is $9.573 / $1.057 = 9.06.