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9 July, 13:48

A firm has net income of $38,000, preferred stock dividends of $10,000, and common stock dividends of $8,000. The firm has 10,000 shares of common stock outstanding that sells for $46 a share. What is the price-earnings (PE) ratio?

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  1. 9 July, 14:09
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    16.43 times

    Explanation:

    The computation of the price-earnings ratio is shown below:

    Price-earnings ratio = (Market price per share) : (Earning per share)

    where,

    Earning per share is

    = (Net income - preferred stock dividends) : (common stock outstanding)

    = ($38,000 - $10,000) : (10,000 shares)

    = ($28,000) : (10,000 shares)

    = $2.8 per share

    So, the price earning ratio would be

    = ($46) : ($2.8)

    = 16.43 times
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