Carter's Books, Inc., has net income of $75,000 and a plowback ratio of 80%. There are 30,000 shares of stock outstanding at a market price of $25.50 a share. What is the price-earnings ratio?
A)6.9
B)8.2
C)9.7
D)10.2
E)11.6

Question

Quizplus · Accepted Answer

First, we need to find the earnings per share (EPS) by using the plowback ratio:

Plowback ratio = Retained earnings / Net income
0.80 = Retained earnings / 75,000
Retained earnings = 60,000
EPS = Retained earnings / Number of shares
EPS = 60,000 / 30,000
EPS = 2

Now we can calculate the price-earnings ratio (P/E ratio):

P/E ratio = Market price per share / EPS
P/E ratio = 25.50 / 2
P/E ratio = 12.75

Therefore, the closest answer choice to 12.75 is D) 10.2.