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Chapter 2: 2BP (page 48)

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.

Short Answer

Expert verified

Earning per share of Sosa Diet Supplements for the year ending:

20X1: $4

20X2: $4.16

Step by step solution

01

Calculation of EPS for the year 20X1

EPS=EarningaftertaxNo.ofsharesoutstanding=$800,000200,000=$4

02

Calculation of EPS for the year 20X2

EPS=Earningaftertax1+increaseinearningNo.ofsharesoutstanding+No.ofsharesissued=$800,0001+30%200,000+50,000=$1,040,000250,000=$4.16

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Most popular questions from this chapter

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?

Botox Facial Care had earnings after taxes of \(370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was \)31.50. In 20X2, earnings after taxes increased to \(436,000 with the same 200,000 shares outstanding. The stock price was \)42.00

a. Compute earnings per share and the P/E ratio for 20X1. The P/E ratio

equals the stock price divided by earnings per share.

b. Compute earnings per share and the P/E ratio for 20X2.

c. Give a general explanation of why the P/E ratio changed.

Mansfield Corporation had 20X1 sales of \(100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

Percent

Cash

5%

Accounts receivable

15

Inventory

20

Net fixed assets

40

Accounts payable

15

Accruals

10

Profit margin after tax

10%

The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 20X1 was \)33 million. Notes payable are currently \(7 million. Long-term bonds and common stock are constant at \)5 million and $10 million, respectively.

a. How much additional external capital will be required for next year if sales

increase 15 percent? (Assume that the company is already operating at full

capacity.)

Assume the following data for Cable Corporation and Multi-Media Inc.

Capable corporation

Muli-media inc

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317,000

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Total assets

402,000

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Total debts

163,000

542,000

Stockholder鈥檚 equity

239,000

423,000

c. Discuss the factors from part b that added or detracted from one firm

having a higher return on stockholders鈥� equity than the other firm as

computed in part a.

Graham Potato Company has projected sales of \(6,000 in September, \)10,000 in October, \(16,000 in November, and \)12,000 in December. Of the company鈥檚 sales, 20 percent are paid for by cash and 80 percent are sold on credit.

Experience shows that 40 percent of accounts receivable are paid in the month after the sale, while the remaining 60 percent are paid two months after. Determine collections for November and December.

Also assume Graham鈥檚 cash payments for November and December are

\(13,000 and \)6,000, respectively. The beginning cash balance in November is

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Prepare a cash budget with borrowing needed or repayments for November

and December. (You will need to prepare a cash receipts schedule first.)
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