Southeastern IT Systems has the following balance sheet and the income statement
ID: 2383953 • Letter: S
Question
Southeastern IT Systems has the following balance sheet and the income statement. The company had 10 million shares of common stock outstanding and its market price of the common stock was $380.25 at the end of 2014. Make sure the unit is in million dollars. Make sure the unit is in million dollars.
(unit: $ in millions)
Southeastern IT Systems
Balance Sheets
2013
2014
2013
2014
Cash
$1,000
$1,200
Accounts payable
$800
$850
Accounts receivable
6,500
7,500
Notes payable
7,500
8,000
Inventory
1,500
2,000
Current liabilities
8,300
8,850
Current assets
9,000
10,700
Long-term debt
1,000
1,000
Net fixed assets
3,000
3,500
Common equity
500
500
Retained earnings
2,200
3,850
Total Assets
$12,000
$14,200
Total Liabilities & Owner’s Equity
$12,000
$14,200
Income Statement
2014
Net sales
$15,000
Cost of goods sold
10,000
Depreciation
700
EBIT
4,300
Interest expenses
400
Taxable income
3,900
Taxes
1,365
Net income
$2,535
Dividends
( )
What is the value of the price-earnings (P/E) ratio?
0.88
1.50
8.70
9.51
Southeastern IT Systems
Balance Sheets
2013
2014
2013
2014
Cash
$1,000
$1,200
Accounts payable
$800
$850
Accounts receivable
6,500
7,500
Notes payable
7,500
8,000
Inventory
1,500
2,000
Current liabilities
8,300
8,850
Current assets
9,000
10,700
Long-term debt
1,000
1,000
Net fixed assets
3,000
3,500
Common equity
500
500
Retained earnings
2,200
3,850
Total Assets
$12,000
$14,200
Total Liabilities & Owner’s Equity
$12,000
$14,200
Explanation / Answer
Ans.The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market prospect ratio that calculates the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share. In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings.
The PE ratio helps investors analyze how much they should pay for a stock based on its current earnings. This is why the price to earnings ratio is often called a price multiple or earnings multiple. Investors use this ratio to decide what multiple of earnings a share is worth. In other words, how many times earnings they are willing to pay.
No of share = 10 million shares of common stock outstanding
market price of the common stock was = $380.25
FORMULA :- price earnings ratio = Market price per share / Eaarning per share
Firstly we have to calculate E.P.S = Net income - pereferred dividend / Averege common share outstanding
= $2,535 / 500,000 =5.07
Now price earnings ratio = $380.25 /5.07 = 75Ans.
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