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Price-Earnings Ratio, Earnings per Share & Net Margin

The following information applies to Ida Construction Company (ICC):

2007 2006
Net sales $425,000 $300,000
Income before interest and taxes 63,750 42,000
Net income 27,625 28,000
Interest expense 10,625 7,500
Stockholders' equity, December 31 386,750 270,000
Common stock 375,150 246,600
Preferred stock dividends $ 12,000 $ 12,000

Information on the number of shares outstanding is provided below:

Average number of common shares outstanding for 2006 38,000
Average number of common shares outstanding for 2007 33,000

Required:

Compute the following ratios for ICC for 2007 and 2006:

(a) Number of times interest is earned;
(b) Earnings per share;
(c) Price-earnings ratio (Market prices: 2007 $8.75 per share, 2006 $7.50 per share);
(d) Return on equity; and
(e) Net margin.

Solution Preview

a. Number of times interest is earned.

Times interest earned = EBIT/Interest
2007
Times interest earned = 63,750/10,625 = 6x
2006
Times interest earned = 42,000/7,500=5.6x

b. Earnings per share

Earnings per ...

Solution Summary

The solution explains how to calculate the following ratios - Number of times interest is earned, Earnings per share, Price-earnings ratio, Return on equity and Net margin.

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