Naples Inc. has provided the following data concerning its stockholders’ equity

Question

Naples Inc. has provided the following data concerning its stockholders’ equity accounts:

Net income for year 2 was $30,400. Dividends on common stock during year 2 totaled $6,400. The market price of common stock at the end of year 2 was $3.08 per share. The company’s price-earnings ratio for year 2 is closest to

Year 2 Year 1 Stockholders' equity Common stock, $5 par value. Additional paid-in capital-common stock Retained eamings $400,000 $400,000 60,000 60,000 654,000 630,000 S1,114,000 $1,090,000 Total stockholders' equity

Explanation / Answer

Calculation of price-earnings ratio for year 2:

Earning per share = Net Income / No. of common shares
= $30,400 / ($400,000 / $5)
= $30,400 / 80,000
= $0.38 per share

Price-earnings ratio = Market price of common stock / Earning per share
= $3.08 / $0.38
= 8.11  

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