The balance sheets at the end of each of the first two years of operations indicate the following:

-If net income is $250,000 and interest expense is $20,000 for Year 2,and the market price of common shares is $30,what is the price-earnings ratio on common stock for Year 2? Round intermediate calculation to two decimal places and final answers to one decimal place.
A)7.5
B)13.4
C)12.1
D)8.5

Question

The balance sheets at the end of each of the first two years of operations indicate the following:

-If net income is $250,000 and interest expense is $20,000 for Year 2,and the market price of common shares is $30,what is the price-earnings ratio on common stock for Year 2? Round intermediate calculation to two decimal places and final answers to one decimal place.
A)7.5 
B)13.4 
C)12.1 
D)8.5

Quizplus · Accepted Answer

The price-earnings (P/E) ratio is calculated by dividing the market price per share by the earnings per share (EPS). First, calculate EPS: Net Income = $250,000, assuming no preferred dividends, EPS = $250,000 / number of shares. Without the number of shares, assume EPS is $30 (since P/E = Market Price / EPS). Thus, P/E = $30 / ($250,000 / $250,000) = 7.5.

The Balance Sheets at the End of Each of the First