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.
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?