Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 13: Q45PGA-2 (page 721)

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock—\)2 Par Value; 60,000 shares

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders’ Equity \( 282,500 \) 260,000

Requirements

2. Compute Bianchi Company’s price/earnings ratio for 2018. Assume the company’s market price per share of common stock is $9. Round to two decimals.

Short Answer

Expert verified

Price/earnings ratio for 2018 of the company is $20

Step by step solution

01

Basic calculation

EarningPerShare=NetIncome-PreferredDividendWeightedAverageCommonStock=$34,380-$11,80050,000=$0.45

02

Computation of Price/earnings ratio for 2018

Price/earnings ratio for 2018

Price of common stock

$9

Earnings per share

$0.45

Price/earnings ratio

$20

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Journalizing treasury stock transactions and reporting stockholders’ equity

Southern Amusements Corporation had the following stockholders’ equity on

November 30:

Paid-In Capital:

Common Stock—\(5 Par Value; 1,300 sharesauthorized, 250 shares issued and outstanding1,250

Retained Earnings50,000

Total Stockholders’ Equity \) 55,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 3,750

Total Paid-In Capital

\(5,000

On December 30, Southern purchased 200 shares of treasury stock at \)15 per share.

Requirements

3. How many shares of common stock are outstanding after the purchase oftreasury stock?

Vollmer, Inc. had reported the following balances:

December 31, 2019 December 31, 2018

Net Income \( 80,000 \) 60,000

Preferred Dividends 2,000 5,000

Total Stockholders’ Equity 340,000 310,000

Stockholders’ Equity attributable to Preferred Stock 20,000 20,000

Number of Common Shares Outstanding 10,000 14,000

11. Compute Vollmer’s earnings per share for 2019.

12. Compute Vollmer’s price/earnings ratio for 2019, assuming the market price is $40 per share.

13. Compute Vollmer’s rate of return on common stockholders’ equity for 2019.

Computing earnings per share and price/earnings ratio

Rocket Corp. earned net income of \(153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket’s books include the following figures:

Preferred Stock—6%, \)60 par value; 2,000 shares authorized, 1,000

shares issued and outstanding \( 60,000

Common Stock—\)5 par value; 80,000 shares authorized, 48,000 shares

issued, 46,700 shares outstanding 240,000

Paid-In Capital in Excess of Par—Common 470,000

Treasury Stock—Common; 1,300 shares at cost (26,000)

Requirements

1. Compute Rocket’s EPS for the year.

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of \(350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)5 par common stock and anticipate an initial market price of \(20 per share, how many shares will they need to issue to raise \)2,750,000?

Journalizing a stock dividend and reporting stockholders’ equity

The stockholders’ equity of Lakeside Occupational Therapy, Inc. on December 31, 2017, follows:

Common Stock—\(1 Par Value; 1,200 shares

authorized, 400 shares issued and outstanding

Paid-In Capital:

120,000

400

2,000

Retained Earnings

Total Stockholders’ Equity \) 122,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 1,600

Total Paid-In Capital

\(

On April 30, 2018, the market price of Lakeside’s common stock was \)16 per share and the company declared a 13% stock dividend. The stock was distributed on May 15.

Requirements

1. Journalize the declaration and distribution of the stock dividend.

2. Prepare the stockholders’ equity section of the balance sheet as of May 31, 2018. Assume Retained Earnings are $120,000 on April 30, 2018, before the stock dividend, and the only change made to Retained Earnings before preparing the balance sheet was closing the Stock Dividends account.
See all solutions

Recommended explanations on Business Studies Textbooks

Human Resources

Read Explanation

Intermediate Accounting

Read Explanation

Organizational Behavior

Read Explanation

Operational Management

Read Explanation

Corporate Finance

Read Explanation

Strategic Analysis

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free