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# Price earnings ratio, earnings per share & acid test ratio

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1. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely:
a. increase.
b. decrease.
c. remain unchanged.
d. cannot be determined.

2. A company has just converted a long-term note receivable into a short-term note receivable. The company's acid-test and current ratios are both greater than 1. This transaction will:
a. increase the current ratio and decrease the acid-test ratio.
b. increase the current ratio and increase the acid-test ratio.
c. decrease the current ratio and increase the acid-test ratio.
d. decrease the current ratio and decrease the acid-test ratio.

3. Ardor Company's net income last year was \$500,000. The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of \$1.00 per share on the common stock and \$0.70 per share on the preferred stock. The earnings per share of common stock is closest to:
a. \$3.33
b. \$3.19
c. \$2.33
d. \$3.47

4. Richmond Company has 100,000 shares of \$10 par value common stock issued and outstanding. Total stockholders' equity is \$2,800,000 and net income for the year is \$800,000. During the year Richmond paid \$3.00 per share in dividends on its common stock. The market value of Richmond's common stock is \$24. What is the price-earnings ratio?
a. 3.0
b. 3.5
c. 4.8
d. 8.0

5. Perkins Company estimates that an investment of \$500,000 would be needed to produce and sell 25,000 units of Product A each year. At this level of activity, the unit product cost would be \$40. Selling and administrative expenses would total \$300,000 each year. The company uses the absorption costing approach to cost-plus pricing described in the text. If a 20% rate of return on investment is desired, then the required markup for Product A would be:
a. 10%
b. 20%
c. 30%
d. 40%

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#### Solution Summary

Answer contains calculation of return on equity,return on assets,acid test ratio,earnings per share,price earnings ratio,mark up under absorption costing.

\$2.19

## Earnings per share, dividend payout & price-earning ratio, etc.

Financial statements for Praeger Company appear below:

Praeger Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities \$100 \$100
Accounts receivable, net 170 170
Inventory 110 110
Prepaid expenses 60 60
Total current assets 440 440
Noncurrent assets:
Plant & equipment, net 2,020 1,990
Total assets \$2,460 \$2,430

Current liabilities:
Accounts payable \$140 \$170
Accrued liabilities 70 50
Notes payable, short term 100 120
Total current liabilities 310 340
Noncurrent liabilities:
Bonds payable 500 500
Total liabilities 810 840
Stockholders' equity:
Preferred stock, \$5 par, 5% 100 100
Common stock, \$5 par 200 200
Additional paid-in capital--common stock 200 200
Retained earnings 1,150 1,090
Total stockholders' equity 1,650 1,590
Total liabilities & stockholders' equity \$2,460 \$2,430

Praeger Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) \$1,100
Cost of goods sold 770
Gross margin 330
Operating expenses 130
Net operating income 200
Interest expense 50
Net income before taxes 150
Income taxes (30%) 45
Net income \$105

Dividends during 19X6 totalled \$45 thousand, of which \$5 thousand were preferred dividends.
The market price of a share of common stock on December 31, 19X6 was \$30.

Required:

Compute the following for 19X6:
(a.) Earnings per share of common stock.

(b.) Price-earnings ratio.

(c.) Dividend payout ratio.

(d.) Dividend yield ratio.

(e.) Return on total assets.

(f.) Return on common stockholders' equity.

(g.) Book value per share.

(h.) Working capital.

(i.) Current ratio.

(j.) Acid-test (quick) ratio.

(k.) Accounts receivable turnover.

(l.) Average collection period (age of receivables).

(m.) Inventory turnover.

(n.) Average sale period (turnover in days).

(o.) Times interest earned.

(p.) Debt-to-equity ratio.

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