Q52PGB - Horngren'S Financial And Managerial Accounting

Question

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

Gullo Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 18,900 \) 24,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 200,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares authorized, 10,000 shares issued and outstanding \) 90,000 \( 90,000

Common Stock—\)1 Par Value; 45,000 shares authorized, 30,000 shares issued and outstanding

30,000 30,000

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

Retained Earnings 51,000 42,000

Total Stockholders’ Equity \( 185,000 \) 176,000

Learning Objectives 3, 4, 6

2. Retained Earnings Dec. 31, 

2018 \(218,280

Requirements

1. Compute Gullo Company’s earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest cent.

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

3. Compute Gullo Company’s rate of return on common stockholders’ equity for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest whole percent.

Step-by-Step Solution

Answer

Earnings per share for 2018 of the company is $ 0.3

Price/earnings ratio for 2018 of the company is $30

Rate of return on common stockholders’ equity for 2018 of the company is 30%

Step 1: Calculation of earnings per share

Earnings per share
Net Income	$18,900
Less: Preferred dividend ($90,000 * 11%)	$(9,900)
a	$9,000
b. Weighted average outstanding shares	30,000
Earnings per share (a/b)	$0.3

Step 2: Calculation of price / earning ratio

Price/earnings ratio for 2018
Price of common stock (a)	$9
Earnings per share (b)	$0.3
Price/earnings ratio (a/b)	$30

Step 3: Calculation of rate of return on common stockholders’ equity

Rate of return on common stockholders’ equity
Net Income	$18,900
Less: Preferred dividend	$9,900
a
b. Weighted average outstanding shares	30,000
Rate of return on common stockholders’ equity (a/b) * 100	30%