#5) A portion of a firm's balance sheet is shown below: common stock ($3 par; 250 shares issued):...
Question:
- 5) A portion of a firm's balance sheet is shown below: common stock ($3 par; 250 shares issued): $750; capital in excess of par: $800; and retained earnings: $600.
What was the market price per share of the stock when it was originally sold?
a) $4.07
b) $1.07
c) $6.20
d) $3.00
e) $8.60
- 6) Last year Rex, Inc. had an operating profit of $2,250,000, paid $125,000 in interest expense. The applicable income tax rate for the year was 34%. The company had 200,000 shares of common stock outstanding at the end of last year.
What was Rex's EPS last year? The company has no preferred stock.
a) $7.01
b) $11.22
c) $7.43
d) $11.25
- 7) You are given: Return on Assets = 20%; Total Asset Turnover = 2.0.
Compute Net Profit Margin:
a) 18%
b) 20%
c) 40%
d) 10%
e) 5%
EPS & Profitability Ratios
Earnings per share and profitability ratios provide useful information about a company's financial position and its profit-generating capacity. Those ratios provide insights to investors and outside users who are interested to know the company's financial position.
Answer and Explanation: 1
1.5) The correct answer choice is D.
The market price per share of the stock when it was originally sold is $3 because the market price per share at that time is the price at par. It is the share price at which stocks were sold during the issuance.
Over time, the value of stock increases from $750 to $1,550 ($750+$800) to $2,150 ($750+$800+$600). The market price per share this year is $8.60 and $6.20 last year.
1.6) The correct answer choice is A.
{eq}EPS_last = Net Income / common shares outstanding {/eq}
{eq}EPS_last = EBIT - Interest - Taxes / common shares outstanding {/eq}
{eq}EPS_last = $2,250,000 - $125,000 - 722,500 / 200,000 {/eq}
{eq}EPS_last = $140,250 / 200,000 {/eq}
{eq}EPS_last = $7.01 {/eq}
1.7) The correct answer choice is D.
Net Profit Margin (NPM) = Revenue (R) / Net Income (NI)
Return on Assets (ROA) = Net Income (NI) / Total Assets (TA)
Total Asset Turnover (TAT) = Revenue (R) / Total Assets (TA)
NPM = 1/ROA * TAT
R/NI = 1/(NI/TA) * R/TA
R/NI = 1/0.20 * 2
R/NI = 0.10
The Net Profit Margin is 10%.
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