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Chapter 15: Q10SE (page 838)

Computing EPS and P/E ratio

Requirements

1. Compute earnings per share (EPS) for 2018 for Accel’s. Round to the nearest cent.

2. Compute Accel’s Companies’ price/earnings ratio for 2018. The market price per

share of Accel’s stock is $12.50.

3. What do these results mean when evaluating Accel’s Companies’ profitability?

Short Answer

Expert verified

Answer

Accel’s Companies price/earnings ratio for 2018 is 17.12

Step by step solution

01

Calculation of EPS

Requirement 1

EPS= (Net Income – Preference dividend) / Weighted average number of common shares outstanding

EPS= (7300-0) / 10,000

EPS=$0.73

02

Calculation of P/E

Requirement 2

Price/ Earnings ratio= Market price per share of common stock / Earning per share

Price/ Earnings ratio= 12.5/ $0.73

Price/ Earnings ratio= 17.12

03

Explanation

Requirement 3

Accel’s Companies price/earnings ratio for 2018 is 17.12 means that the company’s stock is selling at 17.12 times one year’s earnings per share. This is high, high P/E ratio would possibly make the company a good investment opportunity as the market value of company’s stock to be worth 17.12 times its earnings per share.

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Most popular questions from this chapter

Theta Designs, Inc. has the following data:

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 (\()

2017 (\))

Total current assets

25,000

73,440

Property, Plant and Equipment, Net

153,600

168,300

Other Assets

21,400

64,260

Total Assets

200,000

306,000

Liabilities

Total current liabilities

27,600

49,266

Long term debt

72,400

208,998

Total Liabilities

100,000

258,264

Stockholders’ Equity

Total stockholders’ Equity

100,000

47,736

Total liabilities and stockholders’ equity

200,000

306,000

Perform a vertical analysis of Theta Designs’s balance sheet for each year.

The following data are adapted from the financial statements of Bridget’s Shops, Inc.:

Total Current Assets $ 1,216,000

Accumulated Depreciation 2,000,000

Total Liabilities 1,540,000

Preferred Stock 0

Debt Ratio 55%

Current Ratio 1.60

Prepare Bridget’s condensed balance sheet as of December 31, 2018.

Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.


MICATIN INC.

Comparative Income Statement

Years Ended December 31, 2019, and 2018

Dollars in thousands

2019

2018

2017

Net Sales Revenue

\( 181,000

\) 160,000

Cost of Goods Sold

93,500

86,500

Selling and Administrative Expenses

45,000

40,500

Interest Expense

8,000

12,000

Income Tax Expense

11,000

10,500

Net Income

\( 23,500

\) 10,500

Additional data:

Total Assets

\( 209,000

\) 187,000

\( 167,000

Common Stockholders’ Equity

96,000

91,500

80,500

Preferred Dividends

2,000

2,000

0

Common Shares Outstanding During the Year

15,000

15,000

10,000

Requirements

  1. Calculate the profit margin ratio for 2019 and 2018.
  2. Calculate the rate of return on total assets for 2019 and 2018.
  3. Calculate the asset turnover ratio for 2019 and 2018.
  4. Calculate the rate of return on common stockholders’ equity for 2019 and 2018.
  5. Calculate the earnings per share for 2019 and 2018.
  6. Calculate the 2019 dividend payout on common stock. Assume dividends per share for common stock are equal to \)1.13 per share.
  7. Did the company’s operating performance improve or deteriorate during 2019?

Lance Berkman is the controller of Saturn, a dance club whose year-end is December 31. Berkman prepares checks for suppliers in December, makes the proper journal entries, and posts them to the appropriate accounts in that month. However, he holds on to the checks and mails them to the suppliers in January.

Requirements

1. What financial ratio(s) is(are) most affected by the action to hold onto the checks until January?

2. What is Berkman’s purpose in undertaking this activity?

Question: What is trend analysis, and how does it differ from horizontal analysis?
See all solutions

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