Chapter 19, Problem 19.16BYP

(1)

To determine

Earnings per share (EPS): The amount of earnings made available to each common share is referred to as earnings per share. Dilutive securities like convertible bonds, convertible preferred stock, and stock options, reduce the EPS by increasing the common shares.

Use the following formula to determine EPS:

$\begin{array}{c}\begin{array}{l}\text{Earnings }\\ \text{per share}\end{array}\}\text{ = }\frac{\text{Earnings available to common shareholders}}{\text{Weighted average number of common shares outstanding}}\\ \text{= }\frac{\text{Net income –Preferred dividends}}{\text{Weighted average number of common shares outstanding}}\end{array}$

To determine: EPS of Company IF for the year 2016

(2)

To determine

Price-earnings ratio: This is the ratio which measures the market value of share relative to the market price. In other words, it is the value an investor would have to pay to receive one dollar of the earnings.

Use the following formula to determine price-earnings ratio:

$\text{Price-earnings ratio = }\frac{\text{Market price per share}}{\text{Earnings per share}}$

To determine: Price-earnings ratio of Company IF for the year 2016, and comment on the ratio

(3)

To determine

Dividend-pay-out ratio: This is the ratio which measures the amount of cash dividends paid relative to the earnings per share. It is the portion of earnings paid to the investors, the rest being retained earnings.

Use the following formula to determine dividend-payout ratio:

$\text{Dividend-payout ratio = }\frac{\text{Cash dividends per share}}{\text{Earnings per share}}$

To determine: Dividend-payout ratio of Company IF for the year 2016, and comment on the ratio