Question

ABC Company had addition to retained earnings for the current fiscal year just ended of $395,000. The firm paid out $195,000 in cash dividend, and it has ending total equity of $5.3 million. The company currently has 170,000 shares of common stock outstanding. Please answer the following questions:
1. What are earnings per share (E/PS)?
2. Dividends per share?
3. Book value of share?
4. If the stock currently sells for $64 per share, what is the market-to-book ratio?
5. The price to earnings ratio (P/E)?
6. The company had sales of $5.15 million, what is the price to sales ratio (P/S)?
7. Finally, explain the implication of P/E ratio for different types of investors.

Answer 1

Answer:

ABC Company

1. E/PS = $3.47

2. Dividends per share = $1.15

3. Book value of share = $31.18

4. Market-to-book ratio = 2.05 : 1

5. Price to earnings ratio (P/E) = 18.44 times

6. Price to Sales ratio (P/S) = 2.11 times or 2.11 : 1

7. A high P/E ratio shows that a company's share is overvalued and vice versa.  This knowledge will equip the investor to take position.  Some investors are interested in the long-term growth of their investments.  Others are interested in the short-term.  With P/E ratio, an investor who is interested in the long-term growth can determine the market value and the future earnings growth.  For those interested in short-term, they can know when the price is rising to sell off their investment and maximize profit.

Explanation:

Addition to retained earnings = $395,000

Dividend paid out $195,000

Net income $590,000

Ending Equity = $5.3 million

Beginning Equity = $4,905,000 ($5,300,000 - 395,000)

Outstanding common stock shares = 170,000

2) Earnings per share (E/PS) = Earnings or Net Income/ No. of outstanding shares = $590,000/170,000 = $3.47

3) Dividends per share = Dividends paid/ No. of outstanding shares = $195,000/170,000 = $1.15

4) Book value of share = Ending Equity/No. of outstanding shares = $5,300,000/170,000 = $31.18

5) Market-to-book ratio = Market price/book value = $64/$31.18 = 2.05 : 1

6. Price to earnings ratio (P/E) = Market price/EPS = $64: $3.47 = 18.44 times

7. Price to Sales ratio (P/S) = Market Capitalization/Sales Revenue = ($64 x 170,000)/$5,150,000 = 2.11 : 1

8. Market capitalization = Market price of shares multiplied by number of outstanding shares.