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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鈥檚. Round to the nearest cent.

2. Compute Accel鈥檚 Companies鈥� price/earnings ratio for 2018. The market price per

share of Accel鈥檚 stock is $12.50.

3. What do these results mean when evaluating Accel鈥檚 Companies鈥� profitability?

Short Answer

Expert verified

Answer

Accel鈥檚 Companies price/earnings ratio for 2018 is 17.12

Step by step solution

01

Calculation of EPS

Requirement 1

EPS= (Net Income 鈥� 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鈥檚 Companies price/earnings ratio for 2018 is 17.12 means that the company鈥檚 stock is selling at 17.12 times one year鈥檚 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鈥檚 stock to be worth 17.12 times its earnings per share.

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Most popular questions from this chapter

Theta Designs, Inc. has the following data:

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 (\()

2017 (\))

Total current assets

25,000

73,440

Property, Plant and Equipment, Net

153,600

168,300

Other Assets

21,400

64,260

Total Assets

200,000

306,000

Liabilities

Total current liabilities

27,600

49,266

Long term debt

72,400

208,998

Total Liabilities

100,000

258,264

Stockholders鈥� Equity

Total stockholders鈥� Equity

100,000

47,736

Total liabilities and stockholders鈥� equity

200,000

306,000

Perform a vertical analysis of Theta Designs鈥檚 balance sheet for each year.

Preparing common-size statements, analysis of profitability and financial position, comparison with the industry, and using ratios to evaluate a company

Consider the data for Randall Department Stores presented in Problem P15-31B.

Requirements

  1. Prepare a common-size income statement and balance sheet for Randall. The first column of each statement should present Randall鈥檚 common-size statement, and the second column, the industry averages.
  2. For the profitability analysis, compute Randall鈥檚 (a) gross profit percentage and (b) profit margin ratio. Compare these figures with the industry averages. Is Randall鈥檚 profit performance better or worse than the industry average?
  3. For the analysis of financial position, compute Randall鈥檚 (a) current ratio and (b) 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 Randall鈥檚 financial position better or worse than the industry averages?

Grand Oaks Realty鈥檚 net revenue & net income for the following five-year period using 2015 as the base year, follow:

Requirement:

  1. Compute a trend analysis for the net revenue & net income. Round to the nearest full percent.

  2. Which grew faster during the period, net revenue or the net income?

Determining the effects of business transactions on selected ratios Financial statement data of Style Traveler Magazine include the following items:

Cash

\( 23,000

Accounts Receivable, Net

81,000

Merchandise Inventory

185,000

Total Assets

635,000

Accounts Payable

99,000

Accrued Liabilities

37,000

Short-term Notes Payable

51,000

Long-term Liabilities

224,000

Net Income

68,000

Common Shares Outstanding

20,000 shares

Requirements

  1. Compute Style Traveler鈥檚 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

  1. Purchased merchandise inventory of \)49,000 on the account.
  2. Borrowed \(127,000 on a long-term note payable.
  3. Issued 2,000 shares of common stock, receiving cash of \)107,000.
  4. Received cash on account, $5,000.

What are some common red flags in financial statement analysis?
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