Asked by Achera Weaver on Jun 04, 2024
Verified
The income statement for Pointe Company for the year ended December 31 2017 appears below. Sales $720,000 Cost of goods sold $380,000 Gross profit 340,000 Expenses 190,000∗ Net income $150,000\begin{array}{ll}\text { Sales } & \$ 720,000 \\\text { Cost of goods sold } & \$ 380,000 \\\text { Gross profit } & 340,000 \\\text { Expenses } & 190,000^{*} \\\text { Net income } & \$ 150,000\end{array} Sales Cost of goods sold Gross profit Expenses Net income $720,000$380,000340,000190,000∗$150,000 *Includes $20000 of interest expense and $25000 of income tax expense.
Additional information:
1. Common stock outstanding on January 1 2017 was 50000 shares. On July 1 2017 10000 more shares were issued.
2. The market price of Pointe's stock was $11.70 at the end of 2017.
3. Cash dividends of $30000 were paid $7000 of which were paid to preferred stockholders.
Instructions
Compute the following ratios for 2017:
(a) Earnings per share.
(b) Price-earnings.
(c) Times interest earned.
Times Interest Earned
A financial ratio that measures a company's ability to meet its interest obligations based on its current earnings.
Price-earnings
A financial ratio that measures the market value of a stock in relation to its earnings per share, indicating how much investors are willing to pay per dollar of earnings.
Earnings Per Share
A financial metric that calculates the portion of a company's profit allocated to each outstanding share of common stock.
- Facilitate the operation and critique of diverse financial ratios, focusing on liquidity, solvency, and profitability evaluations.
Verified Answer
$150,000−$7,000[50,000+(10,000÷2)]=$143,00055,000=$2.60\frac { \$ 150,000 - \$ 7,000 } { [ 50,000 + ( 10,000 \div 2 ) ] } = \frac { \$ 143,000 } { 55,000 } = \$ 2.60[50,000+(10,000÷2)]$150,000−$7,000=55,000$143,000=$2.60
(b) Price-earnings
$11.70$2.60=4.5 times \frac { \$ 11.70 } { \$ 2.60 } = 4.5 \text { times }$2.60$11.70=4.5 times
(c) Times interest earned
$150,000+$20,000+$25,000$20,000=9.75 times \frac { \$ 150,000 + \$ 20,000 + \$ 25,000 } { \$ 20,000 } = 9.75 \text { times }$20,000$150,000+$20,000+$25,000=9.75 times
Learning Objectives
- Facilitate the operation and critique of diverse financial ratios, focusing on liquidity, solvency, and profitability evaluations.
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