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Chapter 13: Q37E_2 (page 717)

Computing earnings per share and price/earnings ratio

Rocket Corp. earned net income of \(153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket鈥檚 books include the following figures:

Preferred Stock鈥�6%, \)60 par value; 2,000 shares authorized, 1,000

shares issued and outstanding \( 60,000

Common Stock鈥擻)5 par value; 80,000 shares authorized, 48,000 shares

issued, 46,700 shares outstanding 240,000

Paid-In Capital in Excess of Par鈥擟ommon 470,000

Treasury Stock鈥擟ommon; 1,300 shares at cost (26,000)

Requirements

2. Assume Rocket鈥檚 market price of a share of common stock is $12 per share. Compute Rocket鈥檚 price/earnings ratio.

Short Answer

Expert verified

Price/earnings ratio of the company is $3.69

Step by step solution

01

Basic Introduction-

Net income: $153,040

Preferred dividend: ($3,600)

weighted average number of equity share outstanding: $46,050

Earnings per share: $3.25

[(Net income- Preferred dividend)/ weighted average number of equity share outstanding]

02

Computation of price/earnings ratio-

Price/earnings ratio

  1. Market price

$12

  1. Earnings per share

$3.25

Price/earnings ratio (a/b)

$3.69

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Most popular questions from this chapter

On August 1, Hagino Corporation declared a $1.50 per share cash dividend on its common stock (20,000 shares) for stockholders on record as of August 15. Hagino paid the dividend on August 31. Journalize the entries declaring the cash dividend and paying the dividend.

How does authorized stock differ from ouststanding stock?

Computing dividends on preferred and common stock and journalizing

Northern Communications has the following stockholders鈥� equity on December 31,

2018:

Preferred Stock鈥�5%, \(11 Par Value; 150,000 shares authorized, 20,000 shares issued and outstanding

Paid-In Capital:

\) 220,000

760,000

Stockholders鈥� Equity

Paid-In Capital in Excess of Par鈥擟ommon 680,0006

Total Paid-In Capital 1,660,000

Retained Earnings 200,000

Total Stockholders鈥� Equity \( 1,860,000

Common Stock鈥擻)2 Par Value; 575,000 shares

authorized, 380,000 shares issued and outstanding

Requirements

1. Assuming the preferred stock is cumulative, compute the amount of dividends to preferred stockholders and to common stockholders for 2018 and 2019 if total dividends are \(9,000 in 2018 and \)45,000 in 2019. Assume no changes in preferred stock and common stock in 2019.

What is the effect on the accounting equation when cash dividends are declared?

What is the effect on the accounting equation when cash dividends are paid?

Match the accounting terminology to the definitions.

1. Factoring receivables a. A monetary claim against a business or an individual.

2. Debtor b. The party to a transaction who takes on an obligation/payable.

3. Accounts receivable c. Using receivables as security (collateral) for a loan.

4. Maturity date d. The right to receive cash in the future from customers for goods sold or for services provided.

5. Receivable e. The date when a note is due.

6. Pledging receivables f. Selling receivables to a finance company or bank.
See all solutions

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