7) Scotland Corporation had net income for 2018 of $80,000. Scotland had 13,000 shares of common stock
outstanding at the beginning of the year and 24,000 shares of common stock outstanding at the end of the
year. There were 12,000 shares of preferred stock outstanding all year. During 2018, Scotland declared
and paid preferred dividends of $21,000. What is Scotland’s earnings per share? (Round the answer to
two decimal places.)
A) $3.33
B) $3.19
C) $4.32
D) $2.46
8) Newcastle Enterprises had net income for 2018 of $103,000. Newcastle had 39,000 shares of common
stock outstanding at the beginning of the year and 43,000 shares of common stock outstanding at the end
of the year. There were 6000 shares of preferred stock outstanding all year. During 2018, Newcastle
declared and paid preferred dividends of $29,000. What is Newcastle’s earnings per share? (Round the
answer to two decimal places.)
A) $2.51
B) $2.40
C) $1.80
D) $1.72
9) A higher price/earnings ratio signifies a higher return on investment.
10) The price/earnings ratio is the ratio of the earnings per share of common stock to the market price of a
share of the common stock.
11) The price/earnings ratio measures the value that the stock market places on $1 of a company’s
earnings.
12) Which of the following statements regarding the price/earnings ratio is incorrect?
A) The price/earnings ratio represents the market price of one share of common stock.
B) A price/earnings ratio of 9.2 implies that the company’s stock is selling at 9.2 times one year’s earnings
per share.
C) A higher price/earnings ratio signifies a higher return on investment.
D) The price/earnings ratio is most useful when comparing one company to another.
13) The price/earnings ratio _________.
A) represents the market price of one share of common stock
B) of 8.5 implies that the company’s earnings per share is 8.5 times the market price of one share of its
common stock
C) is used by investors to measure the liquidity of their portfolio
D) is most useful when comparing one company to another
14) Lark had net income for 2018 of $104,000. Lark had 32,000 shares of common stock outstanding at the
beginning of the year and 48,000 shares of common stock outstanding at the end of the year. There were
5000 shares of preferred stock outstanding all year. During 2018, Lark declared and paid preferred
dividends of $30,000. On December 31, 2018, the market price of Lark’s common stock is $30 per share
and the market price of its preferred stock is $57 per share. What is Lark’s price/earnings ratio at
December 31, 2018? (Round any intermediate calculations and your final answer to the nearest cent.)
A) 30.81
B) 11.54
C) 13.85
D) 16.22
15) Daniel Corporation had net income for 2018 of $75,000. Daniel had 6000 shares of common stock
outstanding at the beginning of the year and 22,000 shares of common stock outstanding at the end of the
year. There were 8000 shares of preferred stock outstanding all year. During 2018, Daniel declared and
paid preferred dividends of $26,000. On December 31, 2018, the market price of Daniel’s common stock is
$45 per share and the market price of its preferred stock is $73 per share. What is Daniel’s price/earnings
ratio at December 31, 2018? (Round any intermediate calculations and your final answer to the nearest
cent.)
A) 12.86
B) 20.86
C) 13.20
D) 13.63
16) Rather Corporation‘s annual report is as follows.
March 31, 2018
March 31, 2019
Net Income
$358,000
$429,500
Preferred Dividends
0
0
Total Stockholders’ Equity
$4,220,000
$5,112,000
Stockholders’ Equity attributable to Preferred
Stock
0
0
Number of Common Shares Outstanding
275,464
200,168
If the current market price is $17 on March 31, 2019, compute the price/earnings ratio on March 31, 2019.
(Round any intermediate calculations and your final answer to the nearest cent.)
A) 9.39
B) 2.15
C) 1.81
D) 7.91
17) The rate of return on common stockholders’ equity shows the relationship between net income
available to common stockholders and their average common equity invested in the company.
18) The 2019 balance sheet for Standard Electronics reported the following items — with 2018 figures
given for comparison:
Standard Electronics
Balance Sheet
As of December 31, 2019
Standard Electronics
Balance Sheet
As of December 31, 2018
Total Assets
$571,000
$494,000
Total Liabilities
330,000
284,000
Total Stockholders’
Equity (all common)
241,000
210,000
Total Liabilities and
Stockholders’ Equity
$571,000
$494,000
Net income for 2019 was $25,000. Compute the rate of return on common stockholders‘ equity for 2019.
(Round your final answer to two decimal places.)
A) 4.38%
B) 10.37%
C) 11.09%
D) 4.69%
19) Holland Corporation’s annual report is as follows.
March 31, 2017
March 31, 2018
Net Income
$350,000
$441,500
Preferred Dividends
0
0
Total Stockholders’ Equity
$4,380,000
$5,092,000
Stockholders’ Equity attributable to Preferred
Stock
0
0
Number of Common Shares Outstanding
284,000
195,000
Based on the information provided, find the rate of return on common stockholders’ equity on March 31,
2018. (Round your final answer two decimal places.)
A) 8.36%
B) 9.32%
C) 8.67%
D) 7.99%
20) Comment on how an investor would use each of the following ratios to evaluate business
performance.
Ratio
Price/Earnings Ratio
Rate of Return on Common
Stockholders’ Equity
It is used to evaluate an investor‘s ability to earn a
return on common stockholders’ equity of 15% to 20%
is considered good in most industries.
21) Perkins Services reported the following balances:
December 31, 2018
December 31, 2017
Net Income
$ 45,000
$ 42,000
Preferred Dividends
5,000
3,000
Total Stockholders’ Equity
375,000
368,000
Total Stockholders’ Equity
attributable to Preferred Stock
40,000
24,000
Number of Common Shares
Outstanding
16,000
12,000
Compute earnings per share for 2018, price/earnings ratio for 2018, assuming the market price on
December 31, 2018 is $37.50 per share, and the rate of return on common stockholders’ equity for 2018.
(Show your computations and round to two decimal places.)