Young 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.

Young’s common stock, which is listed on a major stock exchange, was quoted at $4 per share on December 31. Young’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 Young’s common stock at December 31?

Question

Young 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.
	
Young’s common stock, which is listed on a major stock exchange, was quoted at $4 per share on December 31. Young’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 Young’s common stock at December 31?

Quizplus · Accepted Answer

To calculate the price earnings ratio (P/E) for Young Corporation, we need to divide the market price per share by the earnings per share (EPS).

Market price per share = $4 (given) 
Earnings per share = Net income / Number of common shares outstanding

From the given information, we know that there were no capital stock transactions and the only shares outstanding were the 10,000 common shares. Therefore,

EPS = Net income / Number of common shares outstanding = $50,000 / 10,000 = $5

Now, we can calculate the P/E ratio:

P/E = Market price per share / Earnings per share = $4 / $5 = 0.8

Therefore, the P/E ratio is 10 to 1 (or 10:1), which is option C.

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