Net income $ 209,600 preferred stock outstanding, 12% cumulative $ 80,000 market price per share of common stock $ 24.00 total stockholders’ equity $ 1,240,000 average number of common shares outstanding 100,000 shares number of common shares outstanding at end of the accounting period 120,000 shares dividends per share on common stock $ 0.50 per share.

based on this information the company's price-earnings ratio:

(a). 5 to 1

(b). 12 to 1

(c). 2 to 1

(d). 10 to 1

Option (B) is correct.

Explanation:

Earning available for equity stockholders:

= Net Income - Preferred stock dividend

= $209,600 - ($80,000 × 12%)

= $209,600 - $9,600

= $200,000

Earning Per Share:

= Earning available for equity stockholders ÷ Average number of common shares outstanding

= $200,000 ÷ 100,000

= $2

Price-Earning Ratio = Price of Share ÷ Earning Per Share

                                 = $24 ÷ $2

                                 = 12 Times or 12:1

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