ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements
Brightwell Co reported profit after tax of $540,000. Preference dividends were $40,000. It had 1,000,000 ordinary shares in issue throughout the year. The market price per share at the year end was $7.50. What is the price/earnings (P/E) ratio?
The P/E ratio is 15.0 times. Earnings for ordinary shareholders are $540,000 less $40,000 preference dividends, giving $500,000, or $0.50 per share. Dividing the $7.50 market price by $0.50 gives 15. Ignoring the preference dividend would overstate EPS and understate P/E.
- A13.9 times
- B15.0 timesCorrect
- C14.0 times
- D16.2 times
Explanation
Earnings attributable to ordinary shareholders = 540,000 - 40,000 = 500,000. EPS = $0.50. P/E = 7.50 / 0.50 = 15.0 times. Using profit before deducting preference dividends gives EPS $0.54 and 13.9 times, which is wrong.
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