PA11-5 Computing and Interpreting Return on Equity (ROE) and Price/Earnings (P/E

Question

PA11-5 Computing and Interpreting Return on Equity (ROE) and Price/Earnings (P/E) Ratios [LO 11-5]

Two magazine companies reported the following in their 2012 financial statements:

BusinessWorld

Fun and Games

Compute the 2012 ROE for each company. (Round your answers to 1 decimal place.)

Which company appears to generate greater returns on stockholders’ equity in 2012?

Compute the 2012 P/E ratio for each company. (Round your answers to 1 decimal place.)

Which company do investors appear to value more?

Two magazine companies reported the following in their 2012 financial statements:

Explanation / Answer

1b. Fun and games with an ROE of 20.8% generated more returns for the shareholders in 2012.

2b. As the P/E multiple of BusinessWorld is higher at 18.50 in 2012, investors appear to be valuing that company more,

Ratio Formula Business World Fun and Games 1a 2012 ROE Net income / Total stockholders' equity 18.9% 20.8% 2a 2012 P/E Ratio Stock price/ Earnings per share 18.50 17.67

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