Chapter 2: 5DQ (page 75)
Is there any validity in rule-of-thumb ratios for all corporations, such asa current ratio of 2 to 1 or debt to assets of 50 percent?
No rule of thumb is valid for all corporations.
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Stilley Corporation had earnings after taxes of \(436,000 in 20X2 with 200,000 shares outstanding. The stock price was \)42.00. In 20X3, earnings after taxes declined to \(206,000 with the same 200,000 shares outstanding. The stock price declined to \)27.80.
a. Compute earnings per share and the P/E ratio for 20X2.
b. Compute earnings per share and the P/E ratio for 20X3.
c. Give a general explanation of why the P/E changed. You might want to
consult the text to explain this surprising result.
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:
c. Debt to total assets 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 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.
In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.
c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)
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