During 2016, Davis, Inc., and Royal, Inc., reported net incomes of $81,000 and $93,000, respectively. Both companies

Question:

During 2016, Davis, Inc., and Royal, Inc., reported net incomes of $81,000 and $93,000, respectively. Both companies had 10,000 shares of common stock issued and outstanding. The market price per share of Davis’s stock was $130, while Royal’s sold for $120 per share.

Required

a. Determine the P/E ratio for each company.

b. Based on the P/E ratios computed in Requirement a, which company do investors believe has the greater potential for growth in income?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...