Concept explainers
(a)
Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).
Use the following formula to compute EPS:
To determine: (a) EPS of Corporation N for 2016 and 2017 and comment on the changes in comparison to its competitor, Corporation M.
(a)
Explanation of Solution
Compute EPS of Corporation N for 2017, if net income is $80,000, preferred dividends are $6,000, and weighted common shares outstanding at the beginning of 2017 40,000 and end of 2017 are 75,000.
Compute EPS of Corporation N for 2016, if net income is $40,000, preferred dividends are $6,000, and weighted common shares outstanding at the beginning of 2016 are 30,000 and end of 2016 are 40,000.
Comments: EPS of Corporation N has increased from 2016 to 2017. This infers that the profitability of the company has increased. The size of the company with respect to number of shares differs for each company. Hence, EPS of Corporation N cannot be compared to Corporation M.
(b)
Formula of current ratio:
Debt to assets ratio: This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company.
Formula of debt to assets ratio:
To determine: (b) Current ratio and debt to assets ratio for 2016 and 2017.
(b)
Explanation of Solution
Compute current ratio for Corporation N for 2017, if current assets are $54,000 and current liabilities are $22,000.
Compute current ratio for Corporation N for 2016, if current assets are $36,000 and current liabilities are $30,000.
Compute debt to assets ratio for Corporation N for the year 2017, if total assets are $240,000 and total liabilities are $72,000.
Compute debt to assets ratio for Corporation N for the year 2016, if total assets are $205,000 and total liabilities are $100,000.
Comments: Current ratio evaluates liquidity whereas debt to assets ratio evaluates solvency. By observing the current ratio for 2016 and 2017, it can be inferred that the liquidity of Corporation N has increased from 1.20 to 2.45. The decrease in debt to assets ratio infers that solvency of Corporation N has improved from 49% in 2016 to 30% in 2017.
(c)
Formula of free cash flow:
To determine: (c) Free cash flow of Corporation N for 2016 and 2017 and comment on the changes.
(c)
Explanation of Solution
Compute free cash flow for Corporation N for 2017, if net cash provided by operating activities is $90,000, capital expenditures are $27,000, preferred dividends paid are $6,000, and common dividends paid are $3,000.
Compute free cash flow for Corporation N for 2016, if net cash provided by operating activities is $56,000, capital expenditures are $12,000, preferred dividends paid are $6,000, and common dividends paid are $1,500.
Comments: The cash-generating capacity of Corporation N has increased from $36,500 in 2016 to $54,000 in 2017.
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Chapter 2 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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