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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.

#### 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

## Profit margin, earning per shares.

Slaubaugh Corporation's most recent balance sheet and income statement appear below:
Statement of Financial Position
December 31, Year 2 and Year 1
(in thousands of dollars)

Year 2 Year 1
Assets
Current assets:
Cash.................................................................... \$ 100 \$ 140
Accounts receivable.............................................. 160 180
Inventory.............................................................. 210 190
Prepaid expenses.................................................. 40 50
Total current assets.................................................. 510 560
Plant and equipment, net.......................................... 860 820
Total assets............................................................. \$1,370 \$1,380

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................. \$ 160 \$ 180
Accrued liabilities.................................................. 80 80
Notes payable, short term..................................... 80 80
Total current liabilities.............................................. 320 340
Bonds payable......................................................... 70 100
Total liabilities.......................................................... 390 440
Stockholders' equity:
Preferred stock, \$100 par value, 10%................... 200 200
Common stock, \$1 par value................................ 200 200
Additional paid-in capital-common stock.............. 130 130
Retained earnings.................................................. 450 410
Total stockholders' equity........................................ 980 940
Total liabilities & stockholders' equity...................... \$1,370 \$1,380

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)

Sales (all on account)............................................... \$1,350
Cost of goods sold.................................................. 820
Gross margin........................................................... 530
Net operating income............................................... 131
Interest expense....................................................... 17
Net income before taxes.......................................... 114
Income taxes (30%)................................................ 34
Net income.............................................................. \$ 80

Dividends on common stock during Year 2 totaled \$20 thousand. Dividends on preferred stock totaled \$20 thousand. The market price of common stock at the end of Year 2 was \$2.88 per share.
Required:
Compute the following for Year 2:
a. Profit Margin percentage
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.

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