2-16. Solution:
Elite Trailer Parks
a. Operating profit (EBIT)………………….….….….….…. $200,000
Interest expense……………………….….….….….…... 10,000
Earnings before taxes (EBT)………………………….…. $190,000
Taxes…………………………………………………….…... 61,250
Earnings after taxes (EAT)…………………………….…. $128,750
17. Earnings per share and retained earnings (LO1 and 3) Quantum Technology had
$669,000 of retained earnings on December 31, 20X2. The company paid common
dividends of $35,500 in 20X2 and had retained earnings of $576,000 on December 31,
20X1. How much did Quantum Technology earn during 20X2, and what would earnings
per share be if 47,400 shares of common stock were outstanding?
2-17. Solution:
Quantum Technology
Retained earnings, December 31, 20X2..….….….…....... $669,000
Less: Retained earnings, December 31, 20X1…….….…. 576,000
19. Price/earning ratio (LO2) Stilley Corporation had earnings after taxes of $436,000 in
20X2 with 200,000 shares outstanding. The stock price was $42.00. In 20X3, earnings after
taxes declined to $206,000 with the same 200,000 shares outstanding. The stock price
declined to $27.80.
a. Compute earnings per share and the P/E ratio for 20X2.
b. Compute earnings per share and the P/E ratio for 20X3.
c. Give a general explanation of why the P/E changed. You might want to consult the
textbook to explain this surprising result.
2-19. Solution:
Stilley Corporation
a. EPS (20X2)
$436,000
200,000
=
= $2.18
P/E ratio (20X2) = Price/EPS =
$42.00
$2.18
= 19.27x
$206,000 $1.03
200,000
= =
20. Cash flow (LO4) Identify whether each of the following items increases or decreases
cash flow:
Increase in accounts receivable Decrease in prepaid expenses
Increase in notes payable Increase in inventory
Depreciation expense Dividend payment
Increase in investments Increase in accrued expenses
Decrease in accounts payable
2-20. Solution:
Increase in accounts receivable – decreases cash flow (use)
Increase in notes payable – increases cash flow (source)
21. Depreciation and cash flow (LO5) The Rogers Corporation has a gross profit of $880,000
and $360,000 in depreciation expense. The Evans Corporation also has $880,000 in gross
profit, with $60,000 in depreciation expense. Selling and administrative expense is
$120,000 for each company.
Given that the tax rate is 40 percent, compute the cash flow for both companies.
Explain the difference in cash flow between the two firms.
2-21. Solution:
Rogers Corporation – Evans Corporation
Rogers Evans
Gross profit…………………………….…..
$880,000
$880,000
22. Free cash flow (LO4) Nova Electrics anticipates cash flow from operating activities of $6
million in 20X1. It will need to spend $1.2 million on capital investments to remain competitive
within the industry. Common stock dividends are projected at $.4 million and preferred stock
dividends at $0.55 million.
a. What is the firm’s projected free cash flow for the year 20X1?
b. What does the concept of free cash flow represent?
2-22. Solution:
Nova Electronics
a. Cash flow from operations activities $6.00 million
– Capital expenditures 1.20
b. Free cash flow represents the funds that are available for
23. Book value (LO3) Landers Nursery and Garden Stores has current assets of $220,000 and
fixed assets of $170,000. Current liabilities are $80,000 and long-term liabilities are
$140,000. There is $40,000 in preferred stock outstanding and the firm has issued 25,000
shares of common stock. Compute book value (net worth) per share.
2-23. Solution:
Landers Nursery and Garden Stores
Current assets
…………………………………….….….….….….….…..
Fixed assets
…………………………………….….….….….….….…..
$220,000
170,000
$390,000
80,000
…………………………………….….….….….….….…..
Net worth assigned to common
…………………………………….….….….….….….…..
Common shares outstanding
…………………………………….….….….….….….…..
Book value (net worth) per share
…………………………………….….….….….….….…..
24. Book value and market value (LO2 and 3) The Holtzman Corporation has assets of
$400,000, current liabilities of $50,000, and long-term liabilities of $100,000. There is $40,000
in preferred stock outstanding; 20,000 shares of common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $22,000 in earnings available to common stockholders, and Holtzman’s stock
has a P/E of 18 times earnings per share, what is the current price of the stock?
c. What is the ratio of market value per share to book value per share?
2-24. Solution:
Holtzman Corporation
a. Total assets
…………………………………………………………
b. Earnings available to common
$400,000
50,000
….…….…….….…………………………………..
b. Earnings available to common
…………………………………………………………
30,000