Future Business Leaders of America (FBLA) Business Calculations Practice Test

Company JKL has 100,000 shares of stock outstanding. The company earned $1 million, sells for $50 per share, and pays a $1 per year. Which combination is correct?

1. A. P/E is 10, yield is 2%, and the EPS is $5

2. B. P/E is 5, yield is 10%, and the EPS is $10

3. C. P/E is 5, yield is 2%, and the EPS is $10

4. D. P/E is 5, yield is 5%, and the EPS is $5

The correct answer is: C. P/E is 5, yield is 2%, and the EPS is $10

To understand why the correct choice is C, let's break down the relevant calculations for the company JKL. 1. **Earnings Per Share (EPS)**: This is calculated by dividing the total earnings by the number of shares outstanding. JKL earned $1 million and has 100,000 shares. Therefore, EPS is: \[ \text{EPS} = \frac{\text{Total Earnings}}{\text{Total Shares}} = \frac{1,000,000}{100,000} = 10 \] So, the EPS is indeed $10, which aligns with the correct choice. 2. **Price-to-Earnings (P/E) Ratio**: This ratio is calculated by dividing the market price per share by the EPS. JKL’s shares sell for $50, and the EPS, as we calculated, is $10. The P/E ratio is: \[ \text{P/E} = \frac{\text{Price per Share}}{\text{EPS}} = \frac{50}{10} = 5 \] This confirms that the P/E is 5, which is also reflected in the correct answer. 3. **Yield**