Two magazine companies reported the following in their 2012 financial statements

Question

Two magazine companies reported the following in their 2012 financial statements: BusinessWorld Fun and Games 2012 2011 2012 2011 Net income $ 109,000 $ 108,404 $ 90,420 $ 171,973 Total stockholders' equity 577,186 502,814 437,151 457,049 Earnings per share 3.00 2.99 1.90 3.78 Stock price when annual results reported 53.90 50.54 32.05 59.20 Required: 1-a. Compute the 2012 ROE for each company. (Round your answers to 1 decimal place.) 1-b. Which company appears to generate greater returns on stockholders’ equity in 2012? BusinessWorld Fun and Games Both Companies appear to generate the same return on equity 2-a. Compute the 2012 P/E ratio for each company. (Round your answers to 1 decimal place.) 2-b. Which company do investors appear to value more? BusinessWorld Fun and Games

Explanation / Answer

All Amounts in $ 1-a. Return on Equity for each Company for 2012 Return on Equity = Net Income / Average Equity for 2012 Average Equity for 2012 = (Opening + Closing Equity) / 2 Business World 540000 Fun and Games 447100 Return on Equity Business World 20.19% Fun and Games 20.22% 1-b Both Companies appear to generate the same return on equity 2-a 2012 P/E Ratio for each Company P/E Ratio = Price Per Share / Earnings Per Share Business World 17.97 Fun and Games 16.87 2-b Companies value Business World more, since it is having a higher P/E Ratio.

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