Q37E_2 - Horngren'S Financial And Managerial Accounting

Question

Computing earnings per share and price/earnings ratio

Rocket Corp. earned net income of \(153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket’s books include the following figures:

Preferred Stock—6%, \)60 par value; 2,000 shares authorized, 1,000 

shares issued and outstanding \( 60,000

Common Stock—\)5 par value; 80,000 shares authorized, 48,000 shares 

issued, 46,700 shares outstanding 240,000

Paid-In Capital in Excess of Par—Common 470,000

Treasury Stock—Common; 1,300 shares at cost (26,000)

Requirements

2. Assume Rocket’s market price of a share of common stock is $12 per share. Compute Rocket’s price/earnings ratio.

Step-by-Step Solution

Answer

Price/earnings ratio of the company is $3.69

Step 1: Basic Introduction-

Net income: $153,040

Preferred dividend: ($3,600)

weighted average number of equity share outstanding: $46,050

Earnings per share: $3.25

[(Net income- Preferred dividend)/ weighted average number of equity share outstanding]

Step 2: Computation of price/earnings ratio-

Price/earnings ratio
Market price	$12
Earnings per share	$3.25
Price/earnings ratio (a/b)	$3.69