LO7. How do we use stockholders\' equity rations to evaluate business performanc
ID: 2400794 • Letter: L
Question
LO7. How do we use stockholders' equity rations to evaluate business performance? Use the following information for ABC Company to calculate the EPS, price/earnings ratio, and return on common stockholders' equity: a. Net Income- $10,000 Preferred Dividends- $2,000 Average Common Stockholders' Equity $300,000 Number of Common Shares Outstanding 20,000 shares i) What is earnings per share? ii) What is price/earnings ratio assuming the market price is $2 per share? What is rate of return on common stockholders' equity (take percentage to 2 decimal places)? iii)Explanation / Answer
i).earnings per share.
(net income - preferred dividend) / number of common shares outstanding
=> (10,000-2000) / 20,000
=>$0.40.
ii).
PE ratio = price per share / earnings per share.
=>$2 / $0.40
=>5 times.
iii)
rate of return on common stockholders equity
=>(net income - preferred dividend) / average common stock holders equity*100
=> (10,000- 2,000) / 300,000*100
=>2.67%.
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