Lab R Doors' year-end price on its common stock is $40. The firm has a profit margin of 10 percent, total assets of $30 million, a total asset turnover ratio of 2, no preferred stock, and there are 4 million shares of common stock outstanding. What is the PE ratio for Lab R Doors?
A) 0.375
B) 0.750
C) 6.667
D) 26.667

Question

Quizplus · Accepted Answer

First, calculate the earnings per share (EPS). The total assets are $30 million, and the total asset turnover ratio is 2, meaning the sales are $60 million ($30 million * 2). With a profit margin of 10%, the net income is $6 million (10% of $60 million). With 4 million shares outstanding, the EPS is $1.50 ($6 million / 4 million shares). The price-earnings (PE) ratio is the share price divided by EPS, which is $40 / $1.50 = 26.667.

Lab R Doors' Year-End Price on Its Common Stock Is