Sheffield Corporation had net income of $1600000 and paid dividends to common stockholders of $500000 in 2017. The weighted average number of shares outstanding in 2017 was 320000 shares. Sheffield Corporation's common stock is selling for $50 per share on the NASDAQ. Sheffield Corporation's price-earnings ratio is:

The answer is: 10

Explanation:

The price-earnings (P/E) ratio is computed to help investors decide how much to pay for their share per dollar of earnings in given company. As indicated in its name, it is a value derived from dividing the price per share by the earnings per share. Earnings per share (EPS) is the value that ordinary shareholders gain from their investment in a corporation. EPS is computed by dividing the total earnings attributable to ordinary shareholders by the number of ordinary shares outstanding.

In this example, the P/E ratio can be computed as follows:

         Net income                     $1,600,000

Less: Preferred Dividends       $0              

Total earnings                          $1,600,000

The weighted number of shares outstanding at year end = 320,000

EPS = $1,600,000/320,000 = $5/share

P/E = $50/$5 = 10

The P/E ratio indicates that investors are willing to pay up to ten times per dollar attained in earnings or ten times the value per ordinary share.

10

Explanation:

Step 1: Calculation of Earning Per Share (EPS)

EPS is the ratio of net income to weighted average number of shares outstanding in a particular year. This can be calculated for Sheffield Corporation as follows:

EPS = $1,600,000 ÷ 320,000 = $5.0

Step 2: Calculation of the Sheffield Corporation's price-earnings (PE) ratio

Price-earnings (PE) ratio is the ratio of market price per share (MPS) to the EPS. Since Sheffield Corporation's common stock is selling for $50 per share on the NASDAQ, its MPS is therefore $50. Price-earnings (PE) ratio can be calculated as follows:

PE ratio = MPS ÷ EPS = $50 ÷ $5 = 10

Therefore, Sheffield Corporation's price-earnings ratio is 10.

This implies that investors are willing to pay $10 per dollar of earnings.

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