Question

A company reports the following:

Line Item Description Amount
Net income $1,601,000
Preferred dividends $91,000
Shares of common stock outstanding 100,000
Market price per share of common stock $188.75
a. Determine the company's earnings per share on common stock. Round your answer to the nearest cent. Use the rounded answer of requirement a for subsequent requirement, if required.
fill in the blank 1 of 2$

b. Determine the company's price-earnings ratio. Round to one decimal place.
fill in the blank 2 of 2

Answer 1

To solve the questions, we'll follow these steps:

### a. Determine the company's earnings per share (EPS) on common stock.

1. **Calculate Net Income Available to Common Shareholders**:
\[
\text{Net Income Available to Common Shareholders} = \text{Net Income} - \text{Preferred Dividends}
\]
\[
= 1,601,000 - 91,000 = 1,510,000
\]

2. **Calculate Earnings Per Share (EPS)**:
\[
\text{EPS} = \frac{\text{Net Income Available to Common Shareholders}}{\text{Shares of Common Stock Outstanding}}
\]
\[
= \frac{1,510,000}{100,000} = 15.10
\]

So, the EPS is **$15.10**.

### b. Determine the company's price-earnings (P/E) ratio.

1. **Calculate Price-Earnings Ratio**:
\[
\text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{EPS}}
\]
\[
= \frac{188.75}{15.10} \approx 12.5
\]

So, the Price-Earnings Ratio is **12.5**.

### Final Answers:

- a. **Earnings per Share (EPS)**: **$15.10**
- b. **Price-Earnings Ratio (P/E)**: **12.5**