Ketchen,Inc.provides the following information for 2018: $$\begin{array} { | l | r | }
\hline \text { Net income } & \$ 270,000 \
\hline \text { Market price per share of common stock } & \$ 55 \text { per share } \
\hline \text { Dividends paid } & \$ 180,000 \
\hline \text { Common stock outstanding at Jan. } 1,2018 & 160,000 \text { shares } \
\hline \text { Common stock outstanding at Dec. } 31,2018 & 240,000 \text { shares } \
\hline
\end{array}$$ The company has no preferred stock outstanding.Calculate the price/earnings ratio of common stock.(Round any intermediate calculations and your final answer to two decimal places.)
A) 48.67 times
B) 55.00 times
C) 40.74 times
D) 32.54 times

Question

Ketchen,Inc.provides the following information for 2018: $$\begin{array} { | l | r | } 
\hline \text { Net income } & \$ 270,000 \
\hline \text { Market price per share of common stock } & \$ 55 \text { per share } \
\hline \text { Dividends paid } & \$ 180,000 \
\hline \text { Common stock outstanding at Jan. } 1,2018 & 160,000 \text { shares } \
\hline \text { Common stock outstanding at Dec. } 31,2018 & 240,000 \text { shares } \
\hline
\end{array}$$ The company has no preferred stock outstanding.Calculate the price/earnings ratio of common stock.(Round any intermediate calculations and your final answer to two decimal places.)
A) 48.67 times
B) 55.00 times
C) 40.74 times
D) 32.54 times

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). We are given the following information:

- No preferred stock outstanding, so we can assume that all earnings are attributable to common stockholders.
- We are not given the market price per share, but we are given the book value per share and the market-to-book ratio. This suggests that we can calculate the market price per share as follows:

Market price per share = Book value per share x Market-to-book ratio
Market price per share = $21.50 x 2.53
Market price per share = $54.40

- The EPS is given as $1.33 per share.

Therefore, the P/E ratio is:

P/E ratio = Market price per share / EPS
P/E ratio = $54.40 / $1.33
P/E ratio = 40.74 times

Therefore, the best answer is C) 40.74 times.

Ketchen,Inc The Company Has No Preferred Stock Outstanding