What is the price/earnings ratio, and how is it calculated?
P/E Ratio also known as the price multiple, or the earnings multipleis computed by dividing the stock’s market price by the earnings per share.
The P/E ratio differs across industries and therefore, should either be contrasted with its companions having a similar operational activity of comparable size or with its historical P/E to assess whether a stock is undervalued or overvalued.
The price/earnings ratio is the financial ratio of the market price of a share of common stock to the corporate's earnings per share. It is calculated by taking the market price per share of common stock and dividing it by earnings per share.
A Identifying sources of equity, stock issuance, and dividends
Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:
Preferred Stock—7%, ? Par Value; 625,000 shares
authorized, 280,000 shares issued and outstanding
Paid-In Capital in Excess of Par—Common 2,900,000
Total Paid-In Capital 5,640,000
Retained Earnings 12,000,000
Total Stockholders’ Equity $ 17,640,000
Common Stock—$1 Par Value; 3,000,000 shares
authorized, 1,340,000 shares issued and outstanding
3. Make two summary journal entries to record issuance of all the Voyage Comfort Specialists’ stock for cash. Explanations are not required.
Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity
Bianchi Company reported these figures for 2018 and 2017:
Net Income $ 34,380 $ 18,000
Dec. 31, 2018 Dec. 31, 2017
Total Assets $ 285,000 $ 280,000
Preferred Stock—11%, $9 Par Value; 60,000 shares
authorized, 12,000 shares issued and outstanding
$ 108,000 $ 108,000
Common Stock—$2 Par Value; 60,000 shares
authorized, 50,000 shares issued and outstanding
Paid-In Capital in Excess of Par—Common 14,000 14,000
Retained Earnings 60,500 38,000
Total Stockholders’ Equity $ 282,500 $ 260,000
1. Compute Bianchi Company’s earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest cent.
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