The following amounts were taken from the financial statements of Leaf Company: $\begin{array}{lrr}
&2017&2016\
\text { Total assets } & \$ 800,000 & \$ 880,000 \
\text { Net sales } & 720,000 & 650,000 \
\text { Gross profit } & 352,000 & 320,000 \
\text { Net income } & 126,000 & 117,000 \
\text { Weighted average number of common shares outstanding } & 90,000 & 90,000 \
\text { Market price of common stock } & \$ 35 & \$ 39
\end{array}$ The price-earnings ratio for 2017 is
A) 21.5 times.
B) 36 times.
C) 4.5 times.
D) 3.0 times.

Question

The following amounts were taken from the financial statements of Leaf Company: $\begin{array}{lrr}
&2017&2016\
\text { Total assets } & \$ 800,000 & \$ 880,000 \
\text { Net sales } & 720,000 & 650,000 \
\text { Gross profit } & 352,000 & 320,000 \
\text { Net income } & 126,000 & 117,000 \
\text { Weighted average number of common shares outstanding } & 90,000 & 90,000 \
\text { Market price of common stock } & \$ 35 & \$ 39
\end{array}$  The price-earnings ratio for 2017 is
A) 21.5 times.
B) 36 times.
C) 4.5 times.
D) 3.0 times.

Quizplus · Accepted Answer

The price-earnings (P/E) ratio is calculated by dividing the market price per share by the earnings per share (EPS). For 2017, the EPS is $126,000 / 90,000 shares = $1.4 per share. The market price is $35, so the P/E ratio is $35 / $1.4 = 25 times.

The Following Amounts Were Taken from the Financial Statements of Leaf