Computing the Price-Earnings Ratio The income statement, statement of retained e

Question

Computing the Price-Earnings Ratio

The income statement, statement of retained earnings, and balance sheet for Hallman Company are as follows:

Also, assume that the price per common share for Hallman Company is $8.30.

Required:

Compute the price-earnings ratio. Round your answer and intermediate calculations to two decimal places.

Hallman Company
Income Statement
For the Year Ended December 31, 2014 Amount Percent Net sales $8,281,989 100.0% Less: Cost of goods sold (5,383,293) 65.0 Gross margin $2,898,696 35.0 Less: Operating expenses (1,323,368) 16.0 Operating income $1,575,328 19.0 Less: Interest expense (50,000) 0.6 Net income before taxes $1,525,328 18.4 Less: Taxes (40%)* (610,131) 7.4 Net income $915,197 11.0 * Includes both state and federal taxes.

Explanation / Answer

Computation of Price Earning Ratio

Price Earning Ratio = Market Price Per share / Earnings per share

................................= $8.30 / [($915,197 - $80,000) / 225,000]

................................= $8.30 / $3.71

................................= 2.24

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