Multiple Choice
A benchmark Price-Earnings (PE) ratio can be determined using:
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14. Financial Statement Analysis
Ratios: Price-Earnings Ratio (PE Ratio)
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MoneyCo had sales revenue and net income during the current year of $500,000 and $60,000, respectively. The total amount of stockholders' equity was $600,000, and common shares outstanding were 120,000 all year. If the market price of the stock is $10, what is the P/E ratio?
A
5
B
10
C
20
D
40
Verified step by step guidance1
Understand the concept of the Price-to-Earnings (P/E) ratio, which is calculated as the market price per share divided by the earnings per share (EPS).
Calculate the Earnings Per Share (EPS) by dividing the net income by the number of common shares outstanding. Use the formula: \( \text{EPS} = \frac{\text{Net Income}}{\text{Common Shares Outstanding}} \).
Substitute the given values into the EPS formula: \( \text{EPS} = \frac{60,000}{120,000} \).
Calculate the P/E ratio using the formula: \( \text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{EPS}} \).
Substitute the calculated EPS and the given market price into the P/E ratio formula: \( \text{P/E Ratio} = \frac{10}{\text{EPS}} \).
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