Longview Corporation has a stock price of $50, has issued 2,000,000 shares of stock, has retained earnings of $4 million dollars, and a dividend yield of 4 percent. The price-earnings ratio for Longview stock is
A)25, which is high compared to historical standards of the market.
B)25, which is low compared to historical standards of the market.
C)12.5, which is low compared to historical standards of the market.
D)12.5, which is high compared to historical standards of the market.

Question

Quizplus · Accepted Answer

The formula for price-earnings ratio is stock price divided by earnings per share. We are not given earnings per share in this problem, but we can calculate it using the information provided. Retained earnings are the earnings that the company has kept rather than paid out in dividends, so they are not the same as earnings per share. However, we can assume that retained earnings are a good approximation of the total earnings of the company. If we divide retained earnings by the number of shares, we get earnings per share of $2. We can then calculate the price-earnings ratio as $50 divided by $2, which equals 25. This is low compared to historical standards of the market, so the correct answer is C.

Longview Corporation Has a Stock Price of $50, Has Issued