Question

Use this information for Kellman Company to answer the question that follow. The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2 Year 1 Total current assets $615,200 $591,900 Total investments 66,600 51,300 Total property, plant, and equipment 913,900 698,600 Total current liabilities 115,200 85,100 Total long-term liabilities 293,400 228,000 Preferred 9% stock, $100 par 96,400 96,400 Common stock, $10 par 502,200 502,200 Paid-in capital in excess of par—Common stock 63,700 63,700 Retained earnings 524,800 366,400 Using the balance sheets for Kellman Company, if net income is $105,200 and interest expense is $47,500 for Year 2, and the market price of common shares is $36, what is the price-earnings ratio on common stock for Year 2? (Round intermediate calculation and final answer to two decimal places.) a.1.92 b.10.40 c.18.75 d.9.50

Answer 1

Answer:

c. 18.75

Explanation:

Kellman Company Year 2 Year 1

Total current assets $615,200 $591,900

Total investments 66,600 51,300

Total property, plant, and equipment 913,900 698,600

Total current liabilities 115,200 85,100

Total long-term liabilities 293,400 228,000

Preferred 9% stock, $100 par 96,400 96,400

Common stock, $10 par 502,200 502,200

Paid-in capital in excess of par—Common stock 63,700 63,700

Retained earnings 524,800 366,400

net income is $105,200 and interest expense is $47,500 for Year 2, and the market price of common shares is $36

price earnings ratio = market price / earnings per share

earnings per share (EPS) = (net income - preferred dividends) / weighted average shares outstanding

net income = $105,200

preferred dividends = $96,400 x 9% = $8,676

weighted average stocks outstanding = $502,200 / $10 = 50,200

EPS = ($105,200 - $8,676) / 50,200 = $1.92

price earnings ratio = $36 / $1.92 = 18.75