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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

Determining the effects of business transactions on selected ratios

Financial statement data of Modern Traveler’s Magazine include the following items:

Cash

\(19,000

Accounts Receivable, Net

82,000

Merchandise Inventory

183,000

Total Assets

638,000

Accounts Payable

102,000

Accrued Liabilities

35,000

Short-term Notes Payable

50,000

Long-term Liabilities

221,000

Net Income

69,000

Common Shares Outstanding

50,000 shares

Requirements

  1. Compute Modern Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:

Current ratio

Debt ratio

Earnings per share

2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.

a. Purchased merchandise inventory of \)42,000 on account.

b. Borrowed \(121,000 on a long-term note payable.

c. Issued 5,000 shares of common stock, receiving cash of \)103,000.

d. Received cash on account, $5,000.

Monroe Corp. reported the following amounts on its balance sheet at December 31, 2018 and 2017:

2018, 2017

Cash and Receivables \( 35,000 \) 40,000

Merchandise Inventory 20,000 15,000

Property, Plant, and Equipment, Net 80,000 60,000

Total Assets \( 135,000 \) 115,000

Prepare a vertical analysis of Monroe Corp. for 2018 and 2017.

Data for Mulberry Designs, Inc. follow:


Requirements

1. Prepare a horizontal analysis of the comparative income statement of Mulberry

Designs, Inc. Round percentage changes to one decimal place.

2. Why did 2018 net income increase by a higher percentage than net sales

revenue?

Question: What are the three main ways to analyze financial statements?

Consider the data for Klein Department Stores presented in Problem P15-24A.

Requirements

1.Prepare a common-size income statement and balance sheet for Klein. The first column of each statement should present Klein’s common-size statement, and the second column, the industry averages.

2.For the profitability analysis, compute Klein’s

  1. gross profit percentage and
  2. profit margin ratio. Compare these figures with the industry averages. Is Klein’s profit performance better or worse than the industry average?

3.For the analysis of financial position, compute Klein’s

  1. current ratio and
  2. debt to equity ratio. Compare these ratios with the industry averages.

Assume the current ratio industry average is 1.47, and the debt-to-equity industry average is 1.83. Is Klein’s financial position better or worse than the industry averages?
See all solutions

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