Q10SE - Horngren'S Financial And Managerial Accounting

Question

Computing EPS and P/E ratio

Requirements

1. Compute earnings per share (EPS) for 2018 for Accel’s. Round to the nearest cent.

2. Compute Accel’s Companies’ price/earnings ratio for 2018. The market price per

share of Accel’s stock is $12.50.

3. What do these results mean when evaluating Accel’s Companies’ profitability?

Step-by-Step Solution

Answer

Answer

Accel’s Companies price/earnings ratio for 2018 is 17.12 

Step 1: Calculation of EPS

Requirement 1

EPS= (Net Income – Preference dividend) / Weighted average number of common shares outstanding

EPS= (7300-0) / 10,000

EPS=$0.73

Step 2: Calculation of P/E

Requirement 2

Price/ Earnings ratio= Market price per share of common stock / Earning per share

 Price/ Earnings ratio= 12.5/ $0.73

Price/ Earnings ratio= 17.12

Step 3: Explanation

Requirement 3

Accel’s Companies price/earnings ratio for 2018 is 17.12 means that the company’s stock is selling at 17.12 times one year’s earnings per share. This is high, high P/E ratio would possibly make the company a good investment opportunity as the market value of company’s stock to be worth 17.12 times its earnings per share.