The balance sheets at the end of each of the first two years of operations indic

Question

The balance sheets at the end of each of the first two years of operations indicate the following:

  1.) If net income is $115,000 and interest expense is $30,000 for 2010 what is the rate earned on total assets for 2010 (round percent to one decimal point)?

2.) If net income is $115,000 and interest expense is $30,000 for 2010, what is the rate earned on stockholders equity for 2010 (round percent to one decimal point)?

The following information pertains to Carlton Company. Assume that all balance sheet amounts represent both average and ending balance figures.  Assume that all sales were on credit.

2010 2009 Total current assets $600,000 $560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 125,000 80,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, $100 par 100,000 100,000 Common stock, $10 par 600,000 600,000 Paid-in capital in excess of par-common stock 60,000 60,000 Retained earnings 325,000 210,000

Explanation / Answer

P/E = Market Value Per Share / Earnings Per Share



P/E = $30 / Earnings Per Share

So now, like number 1, we go off onto another tangent of ratio finding. This time, it's Earnings Per Share.

Earnings Per Share = (Net Income - Dividends) / Average Outstanding Shares

We have the Net Income figure (yay!), so let's plug that pup in:

Earnings Per Share = ($115,000 - Dividends) / Average Outstanding Shares

EPS = ($115,000 - $9,000) / 61,000 = 1.73

So now we go back to our original P/E ratio formula:

P/E = Market Value Per Share / Earnings Per Share

P/E = 30 / 1.73

P/E = 17.34

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