Larkins Company Statement of Financial Position December 31, Year 2 and Year 1 (

Question

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders' equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital--common stock
Retained earnings
Total stockholders' equity
Total liabilities & stockholders' equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

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

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315





Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.


4. Larkins Company's price-earnings ratio on December 31, Year 2 was closest to:

A. 8.91
B. 20.79
C. 8.57
D. 6.00

Explanation / Answer

Price earning ratio on December 31, Year 2 was : C. 8.57 Working: Price Earning Ratio = Market price of the share / Earning per share Earning per share = Total income / No of shares Number of shares = Common stock / Each one cost = 180000 /10 = 18000 Net income = $315,000 Earning per share = 315000 / 18000 = $17.5 Market Price of Share = $150 Price Earning Ratio = 150 / 17.5 = 8.57 Price Earning Ratio = Market price of the share / Earning per share Earning per share = Total income / No of shares Number of shares = Common stock / Each one cost = 180000 /10 = 18000 Net income = $315,000 Earning per share = 315000 / 18000 = $17.5 Market Price of Share = $150 Price Earning Ratio = 150 / 17.5 = 8.57
Thank you.... Price Earning Ratio = Market price of the share / Earning per share Earning per share = Total income / No of shares Number of shares = Common stock / Each one cost = 180000 /10 = 18000 Net income = $315,000 Earning per share = 315000 / 18000 = $17.5 Market Price of Share = $150 Price Earning Ratio = 150 / 17.5 = 8.57

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