Two music companies reported the following in their financial statements: 14 14

Question

Two music companies reported the following in their financial statements: 14 14 Net income Total stockholders' equity Earnings per share Stock price when annual results reported s 27,000 $ 23,802 $ 43,000 $ 36,239 337.101 250.399 486,302 471.198 0.85 13.65 11.95 1.10 17.85 1.00 16.00 0.95 Required: 1-a. Compute the 2015 ROE for each company. (Round your answers to 1 decimal place.) Urban Youth Sound Jonx 1-b. Which company appears to generate greater returns on stockholders equity in 2015? O Urban Youth O Sound Jonx Both Companies appear to generate the same return on equity 2-a. Compute the 2015 P/E ratio for each company. (Round your answers to 1 decimal place.) P/E ratio Urban Youth times Sound Jonx imes 2-b. Which company investors appear to value more? Sound Jonx Urban Youth

Explanation / Answer

1 – a. ROE for both company in 2015;

ROE

Urban Youth

8%

Sound Jonx

9.22%

Explanation;

Formula for ROE is as follow;

Net income / Shareholder’s equity

For Urban Youth;

$27000 / $337101 = 8%

For Sound Jonx;

$43000 / $466302 = 9.22%

1 – b. Which company appears to generate greater returns on stockholders’ equity in 2015;

Answer is (Sound Jonx)

Explanation;

ROE of Sound Jonx is greater than Urban Youth because Sound Jonx have ROE of 9.22% whereas Urban Youth have 8%.

2 – a. P/E ratio for both company in 2015;

ROE

Urban Youth

16.23 times

Sound Jonx

14.37 times

Explanation;

Formula for P/E ratio is as follow;

Market value per share / Earnings per share

For Urban Youth;

17.85 / 1.10 = 16.23 Times (Approx)

For Sound Jonx;

13.65 / 0.95 = 14.37 Times (Approx)

2 – b. Which company investors appear to value more;

Answer is (Urban Youth)

Explanation;

P/E ratio of Urban Youth is greater than Sound Jonx because Urban Youth have P/E ratio of 16.23 times whereas Sound Jonx have 14.23 times.

ROE

Urban Youth

8%

Sound Jonx

9.22%

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