Dalmatian Corporation's Exciting Financial Data Analysis
What is the price/earnings ratio on March 31, 2017 based on the given data?
If the current market price is $19 on March 31, 2016, the price/earnings ratio on March 31, 2017 is 10.50. How was this ratio calculated?
Calculation of Price/Earnings Ratio on March 31, 2017
To compute the price/earnings ratio on March 31, 2017, we first calculate the earnings per share (EPS) for 2016 and 2017 using the given information from the chart.
The EPS for 2016 is calculated as follows:
EPS 2016 = (Net income - Preferred dividends) / Weighted average common shares outstanding
EPS 2016 = ($135,000 - $15,000) / 75,000
EPS 2016 = $1.60 per share
The EPS for 2017 is calculated as follows:
EPS 2017 = (Net income - Preferred dividends) / Weighted average common shares outstanding
EPS 2017 = ($160,000 - $15,000) / 80,000
EPS 2017 = $1.81 per share
With the EPS values calculated, we can now determine the price/earnings ratio:
Price/Earnings Ratio = Market price per share / EPS
Price/Earnings Ratio = $19 / $1.81
Price/Earnings Ratio = 10.50
Therefore, the price/earnings ratio on March 31, 2017, based on the given data, is 10.50.