Question

Use the following comparative figures for Apple and Google.

Key figures	Apple	Google
Net income (in millions)	\(53,394	\)16,348
Cash dividends declared per common share	\(1.98	-
Common shares outstanding (in millions)	5,578.753	687.348
Weighted-average common shares outstanding (in millions)	5,753.421	684.626
Market value (price) per share	\)107.00	\(775.10
Equity applicable to common shares (in millions)	\)119,355	$120,331

Required

1. Compute the book value per common share for each company using these data.
2. Compute the basic EPS for each company using these data.
3. Compute the dividend yield for each company using these data. Does the dividend yield of either of the companies characterize it as an income or growth stock? Explain.
4. Compute, compare, and interpret the price-earnings ratio for each company using these data.

Short answer

Ratios	Apple	Google
Book value per common share	$21.39	$175.06
Basic EPS	$9.28	$23.87
Dividend yield	1.85%	0%
Price-earnings ratio	11.53	32.47

Step-by-step solution

Meaning of Basic EPS

Basic EPS is an allocation calculated by allocating a company's net income to its common stock.

Computing book value per common share

Apple

$\begin{array}{rcl}\mathrm{Book}\mathrm{value}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Equity}\mathrm{applicable}\mathrm{to}\mathrm{share}}{\mathrm{Share}\mathrm{outstanding}}\\ & =& \frac{119,355}{5,578.753}\\ & =& \$21.39\end{array}$

Google

$\begin{array}{rcl}\mathrm{Book}\mathrm{value}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Equity}\mathrm{applicable}\mathrm{to}\mathrm{share}}{\mathrm{Share}\mathrm{outstanding}}\\ & =& \frac{120,331}{687.348}\\ & =& \$175.06\end{array}$

Computing the basic EPS for each company

Apple

$\begin{array}{rcl}\mathrm{Basic}\mathrm{EPS}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{weighted}\mathrm{average}\mathrm{common}\mathrm{share}\mathrm{outstanding}}\\ & =& \frac{53,394}{5,753.421}\\ & =& \$9.28\end{array}$

Google

$\begin{array}{rcl}\mathrm{Basic}\mathrm{EPS}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{weighted}\mathrm{average}\mathrm{common}\mathrm{share}\mathrm{outstanding}}\\ & =& \frac{16,348}{684.626}\\ & =& \$23.87\end{array}$

Computing dividend yield for each company

Apple

$\begin{array}{rcl}\mathrm{Dividend}\mathrm{yield}& =& \frac{\mathrm{Cash}\mathrm{dividend}\mathrm{per}\mathrm{common}\mathrm{share}}{\mathrm{Market}\mathrm{price}\mathrm{per}\mathrm{share}}\\ & =& \frac{1.98}{107}\\ & =& 1.85\%\end{array}$

Google

$\begin{array}{rcl}\mathrm{Dividend}\mathrm{yield}& =& \frac{\mathrm{Cash}\mathrm{dividend}\mathrm{per}\mathrm{common}\mathrm{share}}{\mathrm{Market}\mathrm{price}\mathrm{per}\mathrm{share}}\\ & =& \frac{0}{775.10}\\ & =& 0\%\end{array}$

Computing price earnings ratio

Apple

$\begin{array}{rcl}\mathrm{Price}\mathrm{earning}\mathrm{ratio}& =& \frac{\mathrm{Market}\mathrm{price}\mathrm{per}\mathrm{share}}{\mathrm{Basic}\mathrm{EPS}}\\ & =& \frac{107.00}{9.28}\\ & =& 11.53\end{array}$

Google

$\begin{array}{rcl}\mathrm{Price}\mathrm{earning}\mathrm{ratio}& =& \frac{\mathrm{Market}\mathrm{price}\mathrm{per}\mathrm{share}}{\mathrm{Basic}\mathrm{EPS}}\\ & =& \frac{775.10}{23.87}\\ & =& 32.47\end{array}$

Comparing the price earning ratio for both companies

The price-earnings ratio or P/E ratio is the relationship between a share's price and its earnings per share.

According to an investor, a higher price-earnings ratio is better because it shows that a company will grow in the future.

Google has a higher price-earnings ratio than Apple. Therefore, the investors have a greater expectation of Google's future performance. The price-earnings ratio or P/E ratio is the relationship between a share's price and its earnings per share.