Q7TI - Horngren'S Financial And Managerial Accounting

Question

Vollmer, Inc. had reported the following balances:

December 31, 2019 December 31, 2018

Net Income \( 80,000 \) 60,000

Preferred Dividends 2,000 5,000

Total Stockholders’ Equity 340,000 310,000

Stockholders’ Equity attributable to Preferred Stock 20,000 20,000

Number of Common Shares Outstanding 10,000 14,000

11. Compute Vollmer’s earnings per share for 2019.

12. Compute Vollmer’s price/earnings ratio for 2019, assuming the market price is $40 per share.

13. Compute Vollmer’s rate of return on common stockholders’ equity for 2019.

Step-by-Step Solution

Answer

Earnings per share for 2018 of the company is $6.5

Price/earnings ratio for 2018 of the company is $6.15

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

Step 1: Calculation of earnings per share

Earnings per share
Net Income	$80,000
Less: Preferred dividend	$(2,000)
a	$78,000
b. Weighted average outstanding shares	12,000
Earnings per share (a/b)	$6.5

 

Step 2: Calculation of price / earnings ratio

Price/earnings ratio for 2018
Price of common stock (a)	$40
Earnings per share (b)	$6.5
Price/earnings ratio (a/b)	$6.15

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

Rate of return on common stockholders’ equity
Net Income	$80,000
Less: Preferred dividend	$2,000
a	$78,000
b. Weighted average outstanding shares	12,000
Rate of return on common stockholders’ equity (a/b) * 100	65%