Sunny Skies Solar Company stock is selling at $20 per share. It has retained earnings of $1.50 per share, and dividends of $0.50 per share. What is the price/earnings ratio?

Question

Quizplus · Accepted Answer

The price/earnings ratio is calculated by dividing the stock price by the earnings per share. In this case, the earnings per share is the retained earnings minus the dividends: $1.50 - $0.50 = $1.00. So the price/earnings ratio is $20/$1 = 20. To get it in a more typical form, we can flip the ratio to get 1/20, which is 0.05. But usually the P/E ratio is expressed as a multiple of earnings, so we invert that again to get 20/1, which is 20. Therefore, the correct answer is B) 10.

Sunny Skies Solar Company Stock Is Selling at $20 Per