If a firm has sales of $100, total expenses (including interest and taxes) of $50, has a stock that is selling at $50 per share and has 10 shares of stock outstanding, then the firm has a P/E ratio of:
A) 2.00
B) 1.00
C) 10.0
D) 0.20

Question

Quizplus · Accepted Answer

The P/E ratio is calculated by dividing the market price per share by the earnings per share (EPS). To calculate the EPS, we divide the total earnings (sales - expenses) by the number of outstanding shares.
EPS = (sales - expenses) / number of shares
EPS = ($100 - $50) / 10 = $5
P/E ratio = market price per share / EPS
P/E ratio = $50 / $5 = 10.0
Therefore, the best choice is C, which is 10.0.

If a Firm Has Sales of $100, Total Expenses (Including