Detailed Answer
Answer (B) is correct. The price-earnings ratio is the market price of the common stock per share divided
by earnings per share. To arrive at income available to common shareholders, dividends on preferred stock must be subtracted from net income [$588,000 – (10,000 preferred shares × $100 par value × 6%) = $528,000], making the per-share amount $4.40 ($528,00 ÷ 120,000 common shares Appleseed’s price-earnings ratio is thus 9.09 ($40 ÷ $4.40).