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

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

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