Computing the Price-Earnings Ratio

The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows:

Santiago Systems Income Statement For the Year Ended December 31, 20X2
	Amount		Percent
Net sales	$5,345,000		100.0%
Less: Cost of goods sold	(3,474,250)		65.0
Gross margin	$1,870,750		35.0
Less: Operating expenses	(1,140,300)		21.3
Operating income	$730,450		13.7
Less: Interest expense	(27,000)		0.5
Income before taxes	$703,450		13.2
Less: Income taxes (40%)*	(281,380)		5.3
Net income	$422,070		7.9
* Includes both state and federal taxes.

Santiago Systems Statement of Retained Earnings For the Year Ended December 31, 20X2
Balance, beginning of period	$1,205,500
Net income	422,070
Total	$1,627,570
Preferred dividends	(40,000)
Dividends to common stockholders	(150,000)
Balance, end of period	$1,437,570

Santiago Systems Comparative Balance Sheets At December 31, 20X1 and 20X2
	20X1		20X2
Assets
Current assets:
Cash	$1,900,000		$2,100,000
Marketable securities	350,000		400,000
Accounts receivable (net)	625,000		675,000
Inventories	230,000		240,000
Other	50,000		50,000
Total current assets	$3,155,000		$3,465,000
Property and equipment:
Land	$900,000		$900,000
Building and equipment (net)	1,240,800		1,192,800
Total long-term assets	$2,140,800		$2,092,800
Total assets	$5,295,800		$5,557,800
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, short term	$247,300		$256,230
Accounts payable	240,000		250,000
Current maturity of long-term debt	3,000		4,000
Accrued payables	150,000		160,000
Total current liabilities	$640,300		$670,230
Long-term liabilities:
Bonds payable, 9%	300,000		300,000
Total liabilities	$940,300		$970,230
Stockholders' equity:
Preferred stock, $25 par, 8%	$500,000		$500,000
Common stock, $1.00 par	150,000		150,000
Additional paid-in capital*	2,500,000		2,500,000
Retained earnings	1,205,500		1,437,570
Total stockholders' equity	$4,355,500		$4,587,570
Total liabilities and stockholders' equity	$5,295,800		$5,557,800
* For common stock only.

Also, assume that the price per common share for Santiago is $20.

Required:

Compute the price-earnings ratio. Round earnings per share to two decimal places and use the rounded number to calculate the price-earnings ratio. Round the answer to two decimal places.

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