June2017SupportPackage.pdf

# Book value per share total equity preferred equity

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Book value per share = (Total equity – Preferred equity) ÷ Common shares outstanding = (\$26, 433,841* - \$3,554,405) ÷ 12,195,799 = \$22,879,436 ÷ 12,195,799 = \$1.88 *\$24,209,306 + \$2,861,003 - \$223,551 - \$412,917 51. Correct answer b. Because a stock dividend increases the number of common shares outstanding, Donovan’s book value per common share will decrease. 52. Correct answer c. Because the market price per share has increased while earnings per share remained the same, Arnold’s price/earnings ratio has increased showing a positive trend in growth opportunities in Year 2. 53. Correct answer c. The estimated per share value of Clark’s common stock is \$15.00 as calculated below. Estimated value per share = (Net income ÷ Shares outstanding) x Price/earnings ratio = (\$3,750,000 ÷ 3,000,000) x 12 = \$15.00 54. Correct answer b. The value per share of Kell’s common stock is \$16.50 as shown below. Market to book ratio = Current price ÷ Book value per share 1.5 = X ÷ [(\$3,000,000 + \$24,000,000 + \$6,000,000) ÷ 3,000,000] 1.5X = \$11.00 X = \$16.50 55. Correct answer a. Beg. Balance 100,000 x 3/12 x 1.1 27,500 April 1st 110,000 x 3/12 x 1.1 30,250 July 1st 121,000 x 3/12 30,250 October 1st 116,000 x 3/12 29,000 117,000

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284 56. Correct answer c. ABC’s earnings per share is \$4.38 as shown below. Weighted average shares 1,060,000 x 5/12 441,667 1,120,000 x 7/12 653,333 1,095,000 Earnings per share = (Net income – Preferred dividends) ÷ Weighted average shares = [\$5,300,000 – (10% x \$100 x 50,000)] ÷ 1,095,000 = \$4,800,000 ÷ 1,095,000 = \$4.38 57. Correct answer c. Devlin’s price/earnings ratio is 7.08 as shown below. Price/earnings ratio = Market price per share ÷ Earnings per share = \$34 ÷ \$4.80 = 7.08 58. Correct answer b. Appleseed’s price/earnings ration is 9.09 as shown below. Earnings per share = (Net income – Preferred dividends) ÷ Common shares outstanding = [\$588,000 – (\$6 x 10,000)] ÷ 120,000 = \$528,000 ÷ 120,000 = \$4.40 Price/earnings ratio = Market price per share ÷ Earnings per share = \$40 ÷ \$4.40 = 9.09 59. Correct answer d. Archer’s stock is undervalued by approximately 25% as calculated below. Estimated market value = Industry average P/E ratio x Archer earnings per share = 14.00 x \$3.20 = \$44.80 Archer market difference = \$44.80 - \$36.00 = \$8.80 Percentage difference = \$8.80 ÷ \$36.00 = 24.4% 60. Correct answer a. The price/earnings (P/E) ratio expresses the relationship between the market price of a stock and the stock’s earnings per share. A steady drop in a firm’s P/E ratio could, therefore, indicate that earnings per share has been increasing while the market price of the stock has held steady.
285 61. Correct answer c. Collins earnings per share is \$2.90 as shown below. Earnings per share = (Net income – Preferred dividends) ÷ Common shares outstanding = (\$350,000 - \$60,000*) ÷ 100,000 = \$2.90 *Preferred dividends = (\$100 x .06) x 10,000 = \$60,000 62. Correct answer c. When the common shares outstanding increase as the result of a stock dividend or a stock split, retroactive recognition must be given to these events for all comparative earnings per share presentations. Therefore, Ray Company would 1,000,000 shares for computing earnings per share. 63. Correct answer b. Esther’s earnings per share was \$8.06 as shown below. Weighted average shares Shares Months Weighted Average 10,000 5/12 4,170 12,000 7/12 6,996 11,166 Preferred dividends = (\$100 x .06) x 5,000 = \$30,000 Earnings per share = (Net income – Preferred dividends) ÷ Common shares outstanding = (\$120,000 - \$30,000) ÷ 11,166 = \$8.06 64. Correct answer b. Ray Company’s weighted average number of shares for calculating earnings per share is 137,500 calculated as follows.

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