Recher Corporation's common stock has a par value of $3 per share and has been stable at a total value of $270,000 on the company's balance sheet for several years. The total stockholders' equity at the end of this year was $1,023,000 and at the beginning of the year was $1,010,000. Net income for the year was $17,500. Dividends on common stock during the year totaled $4,500. The market price of common stock at the end of the year was $3.76 per share. The company's price-earnings ratio is closest to:
A)19.79
B)0.51
C)8.36
D)12.53

Question

Quizplus · Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. The earnings per share is calculated by dividing the net income by the number of shares outstanding. The number of shares outstanding is calculated by dividing the total stockholders' equity by the par value per share. In this case, the net income is $17,500, the total stockholders' equity is $1,023,000, and the par value per share is $3. Therefore, the number of shares outstanding is 1,023,000 / 3 = 341,000. The earnings per share is 17,500 / 341,000 = $0.0513. The market price per share is $3.76. Therefore, the price-earnings ratio is 3.76 / 0.0513 = 19.79.

Recher Corporation's Common Stock Has a Par Value of $3