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Chapter 2: 1DQ (page 46)
Discuss some financial variables that affect the price-earnings ratio
The price-earning ratio is affected by the growth in revenues and the return on equity.
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Sosa Diet Supplements had earnings after taxes of $800,000 in 20X1 with 200,000 shares of stock outstanding. On January 1, 20X2, the firm issued 50,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 30 percent.
a. Compute earnings per share for the year 20X1.
b. Compute earnings per share for the year 20X2.
Jolie Foster Care Homes Inc. shows the following data:
Year | Net Income | Total assets | Stockholder鈥檚 Equity | Total debts |
20X1 | \(155,000 | \)2,390,000 | \(761,000 | \)1,629,000 |
20X2 | 191,000 | 2,700,000 | 966,000 | 1,734,000 |
20X3 | 208,000 | 2,730,000 | 1,770,000 | 960,000 |
20X4 | 192,000 | 2,470,000 | 2,220,000 | 250,000 |
a. Compute the ratio of net income to total assets for each year and commenton the trend.
Cyber Security Systems had sales of 3,500 units at $75 per unit last year. The marketing manager projects a 30 percent increase in unit volume sales this year with a 40 percent price increase. Returned merchandise will represent 8 percent of total sales. What is your net dollar sales projection for this year?
Ultravision Inc. anticipates sales of \(290,000 from January through April. Materials will represent 50 percent of sales, and because of level production, material purchases will be equal for each month during the four months of January, February, March, and April.
Materials are paid for one month after the month purchased. Materials purchased
in December of last year were \)25,000 (half of \(50,000 in sales). Labor costs for each of the four months are slightly different due to a provision in the labor contract in which bonuses are paid in February and April. Here are the labor figures:
January | \)15,000 |
February | 18,000 |
March | 15,000 |
April | 20,000 |
Fixed overhead is $11,000 per month. Prepare a schedule of cash payments for January through April.
Lenow鈥檚 Drug Stores and Hall鈥檚 Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here:
Lenow | Hall | ||
Debt @ 10% | \(100,000 | Debt @ 10% | \)200,000 |
Common stock, \(10 par | 200,000 | Common stock, \)10 par | 100,000 |
Total | \(300,000 | Total | \)300,000 |
Shares | 20,000 | Common shares | 10,000 |
a. Compute earnings per share if earnings before interest and taxes are \(20,000, \)30,000, and $120,000 (assume a 30 percent tax rate).
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