During 2016 the Lake Corporation and the River Corporation reported net incomes of $700,000 and $960,000, respectively. Both companies had 200,000 shares of common stock issued and outstanding. The market price per share of Lake’s stock was $50, while River’s sold for $85 per share.
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?