Use the table for the question(s)below.
Consider the following income statement and other information:
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions)
-Luther's price - earnings ratio (P/E)for the year ending December 31,2019 is closest to:
A)7.9.
B)10.1.
C)15.4.
D)16.0.

Question

Use the table for the question(s)below.
Consider the following income statement and other information:
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions) 
-Luther's price - earnings ratio (P/E)for the year ending December 31,2019 is closest to:
A)7.9. 
B)10.1. 
C)15.4. 
D)16.0.

Quizplus · Accepted Answer

We can calculate the price-earnings ratio (P/E) by dividing Luther's market value per share by its earnings per share (EPS). From the income statement, we can see that Luther had a net income of $120 million in 2019. We can calculate EPS by dividing net income by the number of shares outstanding. Unfortunately, the number of shares outstanding is not given in the information provided, so we cannot calculate EPS directly.

However, we are given the total market value of Luther's common stock at the end of 2019, which was $1,848 million. We can use this information to estimate the number of shares outstanding by dividing the market value by the stock price. If we assume that the stock price was the same at the beginning and end of the year, then the average stock price for the year would be approximately $31.54 ($1,848 million / 58.6 million shares). This is just an estimate, but it should be close enough for our purposes.

With this estimate of the stock price, we can calculate the P/E as:
P/E = Stock price / EPS
P/E = $31.54 / (Net income / Number of shares)
P/E ≈ $31.54 / (120 / 58.6)
P/E ≈ $31.54 / 2.05
P/E ≈ 15.4

Therefore, the closest P/E ratio for Luther Corporation for the year ending December 31, 2019 is 15.4, which is answer choice C.

Use the Table for the Question(s)below