Question

Hennessey Chicken and Waffles had $594,500 in sales, and a net profit margin of 4 percent. The firm has 2,750 shares of stock outstanding, with a market price per share of $42.40. What is the price-earnings ratio

Answer 1

The price-earnings ratio for Hennessey Chicken and Waffles would be 4.90

What is price-earning ratio(PE)?

PE ratio is known as the price per earnings ratio. It is the ratio of share price of a company to its earnings per share. The higher the PE ratio, the higher the prospects of higher future performance.

The Price/Earnings Ratio (P/E Ratio) can be calculated as:

= Market Value / Earnings per Share.

First, we need to calculate the net income

Net Income

= Sales x profit margin

= 594500 * 4%

= $23,780

Earnings per share

= (Net profits after taxes – Preferred dividends) / Number of shares of common stock outstanding

= ($23,780 - 0) / 2,750

= $8.65

Therefore,

P/E ratio :

= Market Value / Earnings per Share.

= $42.40 / $8.65

= 4.90

Hence, the price-earnings ratio would be : 4.90

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