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Chapter 2: 17BP (page 149)

The capital structure for Cain Supplies is presented below. Compute the stock price for Cain if it sells at 19 times earnings per share and EBIT is \(50,000. The tax rate is 20 percent.

Cain

Debt @9%

\)100,000

Common stock, \(10 par

200,000

Total

\)300,000

Common shares

20,000

Short Answer

Expert verified

The stock price of the company is $31.16.

Step by step solution

01

Calculation of earning per share

Earning before interest and taxes

$50,000

Less: Interest ($100,000 x 9%)

9,000

Earning before tax

$41,000

Tax @ 20%

8,200

Earning after tax

$32,800

Number of shares

20,000

EPS (EAT/No. of shares)

1.64

02

Calculation of stock price

Stockprice=P/ERatio×EPS=19×1.64=$31.16

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Most popular questions from this chapter

The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.

Stud Clothier

Balance sheet 20X1

Assets

Liabilities and Equity

Cash

\)60,000

Account payable

\(220,000

Account receivable

240,000

Accrued taxes

30,000

Inventory

350,000

Bonds payable (long term)

150,000

Plant and equipment

410,000

Common stock

80,000

Paid in capital

200,000

Retained earnings

380,000

Total assets

\)1,060,000

Total LIbilities and Equity

$1,060,000

Compute the following:

b. Quick ratio.

A firm has net income before interest and taxes of \(193,000 and interest expense of \)28,100.

a. What is the times-interest-earned ratio?

The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,

with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Explain the difference in cash flow between the two firms.

Vriend Software Inc.’s book value per share is \(15.20. If earnings per share is\)1.88 and the firm’s stock trades in the stock market at 3.5 times book value pershare, what will the P/E ratio be? (Round to the nearest whole number.)

Sosa Diet Supplements had earnings after taxes of $800,000 in 20X1 with 200,000 shares of stock outstanding. On January 1, 20X2, the firm issued 50,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 30 percent.

a. Compute earnings per share for the year 20X1.

b. Compute earnings per share for the year 20X2.
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