Question

Hermann Corporation had net income of $200,000 and paid dividends to commonstockholders of $50,000 in 2012. The weighted average number of shares outstanding in2012 was 50,000 shares. Hermann Corporation's common stock is selling for $50 pershare on the New York Stock Exchange. Hermann Corporation's price-earnings ratio is

Answer 1

Answer:

the P/E ratio is 12.5

Explanation:

the price-earning ratio represent how many times the earnings per shares "fits" into the price of the share. It represent how many years are needed to payback the investment of rchase the share.

We first need the earningper share:

$\frac{income - preferred \: dividends}{outstading \: shares} = EPS$

200,000 net income / 50,000 = 4 dollars EPS

price-earnings ratio:

$\frac{Price}{EPS}  = P/E$

50/4 = 12.5 years