Lerner's net income for 2016 was $104,000. The company had 32,000 shares of common stock outstanding at the beginning of the year and 48,000 at the end of the year, as well as 5,000 shares of preferred stock outstanding throughout the year. In 2016, Lerner declared and paid $30,000 in preferred dividends. On December 31, 2016, the market price of Lerner's common stock was $30 per share, while the preferred stock's market price was $57 per share. To calculate the price/earnings ratio, we must first determine the earnings per share (EPS) for common stock by adjusting the net income to exclude preferred dividends: Net Income - Preferred Dividends = Earnings Available for Common Stockholders $104,000 - $30,000 = $74,000 We continue by calculating the weighted average number of common shares outstanding. With 32,000 shares at the start and 48,000 at the end, the average is: (32,000 shares + 48,000 shares) / 2 = 40,000 average shares Now we calculate the EPS: EPS = Earnings Available for Common Stockholders / Weighted Average Shares Outstanding EPS = $74,000 / 40,000 shares EPS = $1.85 Finally, we find the price/earnings (P/E) ratio: P/E Ratio = Market Price per Share / Earnings per Share P/E Ratio = $30 / $1.85 P/E Ratio = 16.22 (rounded to two decimal places)

Question

Lerner's net income for 2016 was $104,000. The company had 32,000 shares of common stock outstanding at the beginning of the year and 48,000 at the end of the year, as well as 5,000 shares of preferred stock outstanding throughout the year. In 2016, Lerner declared and paid $30,000 in preferred dividends. On December 31, 2016, the market price of Lerner's common stock was $30 per share, while the preferred stock's market price was $57 per share. To calculate the price/earnings ratio, we must first determine the earnings per share (EPS) for common stock by adjusting the net income to exclude preferred dividends: Net Income - Preferred Dividends = Earnings Available for Common Stockholders $104,000 - $30,000 = $74,000 We continue by calculating the weighted average number of common shares outstanding. With 32,000 shares at the start and 48,000 at the end, the average is: (32,000 shares + 48,000 shares) / 2 = 40,000 average shares Now we calculate the EPS: EPS = Earnings Available for Common Stockholders / Weighted Average Shares Outstanding EPS = $74,000 / 40,000 shares EPS = $1.85 Finally, we find the price/earnings (P/E) ratio: P/E Ratio = Market Price per Share / Earnings per Share P/E Ratio = $30 / $1.85 P/E Ratio = 16.22 (rounded to two decimal places)

Business · College · Thu Feb 04 2021

llm

Answered on Wed Nov 15 2023

Answer: To calculate the price/earnings ratio, or P/E ratio, for Lerner's common stock, follow these steps:

1. Adjust Net Income for Preferred Dividends:- Net Income: $104,000 - Preferred Dividends: $30,000 - Earnings Available for Common Stockholders = Net Income - Preferred Dividends = $104,000 - $30,000 = $74,000

2. Calculate Weighted Average Number of Common Shares Outstanding:The number of shares increased during the year, so we need to calculate a weighted average: Assuming the stock increase occurred uniformly over the year, the weighted average is: - (32,000 shares + 48,000 shares) / 2 = 40,000 average shares

3. Determine Earnings Per Share (EPS):- Earnings Available for Common Stockholders = $74,000 - Weighted Average Shares Outstanding = 40,000 shares - EPS = Earnings Available for Common Stockholders / Weighted Average Shares Outstanding = $74,000 / 40,000 shares = $1.85

4. Calculate the Price/Earnings Ratio (P/E Ratio): - Market Price per Share of Common Stock: $30 - Earnings Per Share (EPS): $1.85 - P/E Ratio = Market Price per Share / Earnings Per Share = $30 / $1.85 ≈ 16.22 (rounded to two decimal places)

Hence, the P/E ratio for Lerner's common stock is approximately 16.22.

The price/earnings (P/E) ratio is a commonly used metric to value a company's stock. It reflects how much investors are willing to pay for a dollar of the company's earnings. A higher P/E ratio might indicate that the market expects the company's earnings to grow in the future, whereas a lower P/E ratio could suggest that the stock is undervalued or that the company's earnings are expected to decline.

It's important to note that the P/E ratio doesn't tell you everything about a company's health or stock potential. This ratio must be considered in the context of the company's industry, the market conditions, and other factors. Additionally, the ratio can be skewed by non-recurring events that impact net income or the number of shares outstanding, so deeper analysis always benefits from looking at other financial metrics and considering the company's overall performance, strategy, and market position.

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