Answer:
Silva Company
1. Computation of Earnings per share for 2018, assuming the company paid the minimum preferred dividend during 2018:
Earnings per share (EPS) = Net Income/Outstanding common shares
= $34,800/60,000 = $0.58
2. Computation of price/earnings ratio for 2018, market price is $7
Price/Earnings ratio = Market price/EPS = $7/$0.58 = 12.07
3. Computation of rate of return on common stockholders' equity for 2018, assuming the company paid the minimum preferred dividend during 2018:
Rate of return on common stockholders' equity = Net Income/ Common Stockholders' equity x 100
= $34,800/($215,000 - 80,000) x 100 = 25.78%
Explanation:
a) Data
1) Income Statement-partial
2018 2017
Net Income $34,800 $17,000
2) Balance Sheet-partial:
Dec. 31, 2018 Dec. 31, 2017
Total Assets 280,000 200,000
Paid-In Capital:
Preferred Stock-6%, $10 Par Value,
90,000 shares authorized,
8,000 shares issued and outstanding $80,000 $80,000
Common Stock-$1 Par Value;
75,000 shares authorized;
60,000 shares issued and outstanding 60,000 60,000
Paid-In Capital in Excess of Par-Common 10,000 10,000
Retained Earnings 65,000 35,000
Total Stockholders' Equity 215,000 185,000
b) Earnings per share: This is the net income divided by the number of common stock shares outstanding. It indicates how profitable a company is, especially with regard to the outstanding common stock shares.
c) Price/Earnings ratio: This is a ratio of the market price of common stock over the earnings per share. It is used to place a value on a company and to know if the share is overvalued or undervalued.
d) Rate of Return on common stockholders' equity: This is the ratio of net income available for common stockholders over the value of common stockholders' equity. Common Stockholders' equity is Equity less preferred stockholders' equity.
