A company reports the following: Net income $185,000 Preferred dividends $25,000

A company reports the following:

Net income $185,000
Preferred dividends $25,000
Shares of common stock outstanding 100,000
Market price per share of common stock $20

a. Determine the company’s earnings per share on common stock.
b. Determine the company’s price-earnings ratio.

Answer:
 

a. Earnings per Share
on Common Stock =

Shares of Common Stock Outstanding
Earnings per Share =   ($185,000 – $25,000) ÷ $100,000
on Common Stock
Earnings per Share =
on Common Stock

$1.60
b. Price-Earnings Ratio = M
arket Price per Share of Common Stock
Earnings per Share on Common Stock
Price-Earnings Ratio =
Price-Earnings Ratio =

$20.00 ÷ $1.60

12.5 

A company reports the following:

Net income$1,000,000
Preferred dividends 50,000
Average stockholders’ equity 6,250,000
Average common stockholders’ equity 3,800,000

Determine (a) the rate earned on stockholders’ equity and (b) the rate earned on common stockholders’ equity. Round to one decimal place.

Answer:

 a. Rate Earned on Stockholders’ Equity = 

Rate Earned on Stockholders’ Equity 

Rate Earned on Stockholders’ Equity 

 

=   $1,000,000 ÷ $6,250,000 

 

=   16.0% 

b. Rate Earned on Common 

Stockholders’ Equity 

Rate Earned on Common 

Stockholders’ Equity = 

Rate Earned on Common 

Net Income – Preferred Dividends 

Average Common Stockholders’ Equity 

 

$1,000,000 – $50,000 

Stockholders’ Equity =  25.0%