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Chapter 13: Q24RQ (page 707)

What is the price/earnings ratio, and how is it calculated?

Short Answer

Expert verified

P/E Ratio also known as the price multiple, or the earnings multipleis computed by dividing the stock’s market price by the earnings per share.

Step by step solution

01

Introduction to topic

The P/E ratio differs across industries and therefore, should either be contrasted with its companions having a similar operational activity of comparable size or with its historical P/E to assess whether a stock is undervalued or overvalued.

02

The price/earnings ratio

The price/earnings ratio is the financial ratio of the market price of a share of common stock to the corporate's earnings per share. It is calculated by taking the market price per share of common stock and dividing it by earnings per share.

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Most popular questions from this chapter

A Identifying sources of equity, stock issuance, and dividends

Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—7%, ? Par Value; 625,000 shares

authorized, 280,000 shares issued and outstanding

Paid-In Capital:

\( 1,400,000

1,340,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,900,000

Total Paid-In Capital 5,640,000

Retained Earnings 12,000,000

Total Stockholders’ Equity \) 17,640,000

Common Stock—$1 Par Value; 3,000,000 shares

authorized, 1,340,000 shares issued and outstanding

Requirements

3. Make two summary journal entries to record issuance of all the Voyage Comfort Specialists’ stock for cash. Explanations are not required.

What is a prior-period adjustment?

If stock is issued for assets other than cash describe the recording of this transaction

What does the statement of stockholders’ equity report? How does the statement of stockholders’ equity differ from the statement of retained earnings?

Journalizing issuance of stock

Steller Systems completed the following stock issuance transactions:

May 19 Issued 1,700 shares of \(3 par value common stock for cash of \)10.50 per share.

Jun. 3 Issued 300 shares of \(9, no-par preferred stock for \)15,000 cash.

11 Received equipment with a market value of \(68,000 in exchange for 5,000 shares of the \)3 par value common stock.

Requirements

2. How much paid-in capital did these transactions generate for Steller Systems?
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