LO7 How do we use stockholders equity rations to evaluate bu

LO7. How do we use stockholders\' equity rations to evaluate business performance? Use the following information for ABC Company to calculate the EPS, price/earnings ratio, and return on common stockholders\' equity: a. Net Income- $10,000 Preferred Dividends- $2,000 Average Common Stockholders\' Equity $300,000 Number of Common Shares Outstanding 20,000 shares i) What is earnings per share? ii) What is price/earnings ratio assuming the market price is $2 per share? What is rate of return on common stockholders\' equity (take percentage to 2 decimal places)? iii)

Solution

i).earnings per share.

(net income - preferred dividend) / number of common shares outstanding

=> (10,000-2000) / 20,000

=>$0.40.

ii).

PE ratio = price per share / earnings per share.

=>$2 / $0.40

=>5 times.

iii)

rate of return on common stockholders equity

=>(net income - preferred dividend) / average common stock holders equity*100

=> (10,000- 2,000) / 300,000*100

=>2.67%.