HuskeyD.FIN504.WK2.xlsx - P35 Calculation of EPS and...

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International Financial Management
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Chapter 17 / Exercise 16
International Financial Management
Madura
Expert Verified
P3–5 Calculation of EPS and retained earnings Everdeen Mining, Inc., ended 2015 with a net profit before taxes of $436,000. The company is subject to a 40% tax rate and must pay $64,000 in preferred stock dividends before distributing any earnings on the 170,000 shares of common stock currently outstanding. a. Calculate Everdeen’s 2015 earnings per share (EPS). b. If the firm paid common stock dividends of $0.80 per share, how many dollars would go to retained earnings?
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International Financial Management
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Chapter 17 / Exercise 16
International Financial Management
Madura
Expert Verified
436,000 x 40%= 174,400 Taxes owed 436,000 -174,400 Less taxes -64,000 Less preferred stock dividends 197,600 Earnings available for common stockholders Common stock dividends Retained earnings
P3–12 Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to one another. Some of his ratios are listed below. Ratio Island Burger Fink Roland Electric Utility Heaven Software Motors Current ratio 1.10 1.3 6.8 Quick ratio 0.90 0.82 5.2 Debt ratio 0.68 0.46 0.0 Net profit margin 6.2% 14.3% 28.5% 8.4% Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn’t investors invest all their money in software companies instead of in less profitable companies? (Focus on risk and return.) 4.5 3.7 0.35
A) Ratios are different and acceptable depending on what type of industry the company follows. norms are not the same across the board for all companies. Each type of company has its own ac ratio measurements. B) Current ratio indicates liquidity. This is dependant on firm size, volatility of the business and sh financing sources. The acceptable rates for each company is largely dependant on the type of com business is. The revenues for these companies are more predictable and require less liquid C) Increased debt brings a greater risk to the company, but also has a higher expected return. Th copany is able to carry a larger amount of debt because it has a more stable income and less inve manage. D) The software company has no debt ratio and a high net profit margin. Software can be a volati and not as stable of a return as an electric company. The lack of debt may mean that the software has less financial leverage, which could mean less potential risk or return.
Industry cceptable hort term mpany the dity.

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