Napoli Industries had net income for Year 2 of $650,000. Napoli had an average number of shares outstanding at the end of the year of 500,000 shares. On January 1, Year 2, the market price of Napoli's stock was $20 per share. On December 31, Year 2, the market price was $22 per share. What is the price-earnings ratio for Napoli at the end of Year 2?

Question

Quizplus · Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. The earnings per share is calculated by dividing the net income by the average number of shares outstanding. In this case, the net income is $650,000, the average number of shares outstanding is 500,000 shares, and the market price per share on December 31, Year 2 is $22. Therefore, the earnings per share is $650,000 / 500,000 shares = $1.30 per share. The price-earnings ratio is $22 / $1.30 per share = 16.9.

Napoli Industries Had Net Income for Year 2 of $650,000