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Chapter 2: 26BP (page 52)
Vriend Software Inc.鈥檚 book value per share is \(15.20. If earnings per share is\)1.88 and the firm鈥檚 stock trades in the stock market at 3.5 times book value pershare, what will the P/E ratio be? (Round to the nearest whole number.)
The P/E ratio of Vriend Software Inc. is 28.
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Dr. Zhiva虁go Diagnostics Corp.鈥檚 income statement for 20X1 is as follows
| Sales | \( 2790000 |
| Cost of goods sold | 1790000 |
| Gross profits | \) 1000000 |
| Selling and administrative expenses | 302000 |
| Operating profits | \( 698000 |
| Interest Expense | 54800 |
| Income before tax | \) 643200 |
| Taxes 30% | 192960 |
| Income after tax | $ 450240 |
b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?
Quantum Technology had \(669,000 of retained earnings on December 31, 20X2. The company paid common dividends of \)35,500 in 20X2 and had retained earnings of $576,000 on December 31, 20X1. How much did Quantum Technology earn during 20X2, and what would earnings per share be if 47,400 shares of common stock were outstanding?
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 |
b. Explain the relationship between earnings per share and the level of EBIT.
The Sterling Tire Company鈥檚 income statement for 20X1 is as follows:
STERLINE TIRE COMPANY Income Statement For the year ended December 31, 20X1 | |
Sales (20,000 tires at \(60 each) | \)1,200,000 |
Less: variable costs (20,000 tires at \(30) | 600,000 |
Less: fixed cost | 400,000 |
Earnings before interest and taxes (EBIT) | \)200,000 |
Interest expenses | 50,000 |
Earning before taxes (EBT) | \(150,000 |
Income tax expenses (30%) | 45,000 |
Earning after taxe (EAT) | \)105,000 |
Given this income statement, compute the following:
a. Degree of operating leverage.
a. Swank Clothiers had sales of \(383,000 and cost of goods sold of \)260,000. What is the gross profit margin (ratio of gross profit to sales)?
b. If the average firm in the clothing industry had a gross profit of 25 percent,
how is the firm doing?
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