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    Price-Earnings Ratio, Earnings per Share & Net Margin

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    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.

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    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.

    $2.19

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