Cultivo Corporation's capital stock at December 31 consisted of the following:
(a)Common stock,$2 par value; 100,000 shares authorized,issued,and outstanding.
(b)10% noncumulative,nonconvertible preferred stock,$100 par value; 1,000 shares authorized,issued,and outstanding.
Cultivo's common stock,which is listed on a major stock exchange,was quoted at $4 per share on December 31.Cultivo's net income for the year ended December 31 was $50,000.The yearly preferred dividend was declared.No capital stock transactions occurred.What was the price earnings ratio on Cultivo's common stock at December 31?

Question

Quizplus · Accepted Answer

The price earnings ratio (P/E ratio) is calculated by dividing the market price per share by the earnings per share (EPS). First, calculate the EPS: Net income ($50,000) minus preferred dividends ($10,000) divided by the number of common shares (100,000) gives an EPS of $0.40. The market price per share is $4. Therefore, the P/E ratio is $4 / $0.40 = 10 to 1.

Cultivo Corporation's Capital Stock at December 31 Consisted of the Following