Q45PGA-2 - Horngren'S Financial And Managerial Accounting

Question

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares 

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock—\)2 Par Value; 60,000 shares 

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders’ Equity \( 282,500 \) 260,000

Requirements

2. Compute Bianchi Company’s price/earnings ratio for 2018. Assume the company’s market price per share of common stock is $9. Round to two decimals.

Step-by-Step Solution

Answer

Price/earnings ratio for 2018 of the company is $20

Step 1: Basic calculation

$\begin{array}{rcl}\mathbf{EarningPerShare}& \mathbf{=}& \frac{\mathbf{NetIncome}\mathbf{-}\mathbf{PreferredDividend}}{\mathbf{WeightedAverageCommonStock}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{34}\mathbf{,}\mathbf{380}\mathbf{-}\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{800}}{\mathbf{50}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{45}\\ & & \end{array}$

Step 2: Computation of Price/earnings ratio for 2018

Price/earnings ratio for 2018
Price of common stock	$9
Earnings per share	$0.45
Price/earnings ratio	$20