Ronny is considering investing in Markman,Inc.The current price of Markman is $40 a share,the after-tax earnings are $21,600,000,and there are 10,000,000 outstanding shares of common stock.What is Markman's price/earnings ratio?

Question

Quizplus · Accepted Answer

To calculate the price/earnings ratio, we divide the current stock price by the earnings per share.

Earnings per share = (after-tax earnings) / (number of outstanding shares) 
= $21,600,000 / 10,000,000 
= $2.16 per share

Price/earnings ratio = (current stock price) / (earnings per share) 
= $40 / $2.16 
= 18.5

Therefore, the price/earnings ratio for Markman, Inc. is 18.5, which corresponds to choice (B).

Ronny Is Considering Investing in Markman,Inc