Leonhardt Corporation's net income last year was $3,800,000. The dividend on common stock was $2.00 per share and the dividend on preferred stock was $1.80 per share. The market price of common stock at the end of the year was $53.40 per share. Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to:
A) 9.54
B) 7.03
C) 7.38
D) 10.19

Question

Quizplus · Accepted Answer

First, let's calculate the total common stock dividend paid:

Total common stock dividend = $2.00 x 500,000 = $1,000,000

Then, let's calculate the total preferred stock dividend paid:

Total preferred stock dividend = $1.80 x 100,000 = $180,000

Next, let's calculate the total earnings available to shareholders:

Total earnings available to shareholders = Net income - Preferred stock dividend = $3,800,000 - $180,000 = $3,620,000

Finally, we can calculate the earnings per share (EPS) for the common stock:

EPS = (Net income - Preferred stock dividend - Total common stock dividend) / Number of common shares outstanding

EPS = ($3,800,000 - $180,000 - $1,000,000) / 500,000 = $4.24

The price-earnings ratio can be calculated as the market price per share divided by the EPS:

P/E ratio = Market price per share / EPS = $53.40 / $4.24 = 12.58

Therefore, the answer is not listed, instead it should be:

Answer: None of the Above
 The calculated P/E ratio is 12.58 and is not one of the answer choices.

Leonhardt Corporation's Net Income Last Year Was $3,800,000