Phelps, Inc. had assets of $67,646, liabilities of $15,466, and 10,718 shares of outstanding common stock at December 31, 2017. Net income for 2017 was $7,829. The company had assets of $79,571, liabilities of $18,551, 10,771 shares of outstanding common stock, and its stock was trading at a price of $10 per share at December 31, 2018. Net income for 2018 was $9,993.Required:Part a. Calculate EPS for 2018.Part b. Calculate ROE for 2018.Part c. Calculate the Price/Earnings ratio for 2018
What will be an ideal response?
Part a
2018 EPS = (Net income - Preferred dividends) ÷ Average number of common shares outstanding
= ($9,993 - $0) ÷ [(10,718 + 10,771) ÷ 2] = $0.93 per share
Part b
Assets = Liabilities + Stockholders' Equity
Stockholders' Equity = Assets - Liabilities
December 31, 2017:
= $67,646 - $15,466 = $52,180
December 31, 2018:
= $79,571- $18,551 = $61,020
2018 Return on equity = (Net income - Preferred dividends) ÷ Average common stockholders' equity
= ($9,993 - $0) ÷ [($52,180 + $61,020) ÷ 2] = 0.177 = 17.7%
Part c
Price/Earnings Ratio = Current stock price (per share) ÷ Earnings per share (annual)
= $10 per share ÷ $0.93 per share = 10.75
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