Question

The following was provided by Morris Company as of December 31: Net income $ 528,000 Preferred...

The following was provided by Morris Company as of December 31:

Net income $ 528,000

Preferred stock, (20,000 shares at $10 par, 4%) $ 200,000

Common stock, (220,000 shares at $1 par) $ 220,000

Paid-in capital in excess of par-common $ 2,475,500

Retained earnings $ 3,824,500

On the most recent trading date, Morris common shares sold at $36 and the preferred shares sold at $14. The following information on industry averages is provided:

• Earnings per share $2.06

• Price-earnings ratio 13.2:1

1) Calculate and compare Morris Company's ratios with the industry averages shown above.

2) Would you invest in Morris’s Company?

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Homework Answers

Answer #1

1. Earnings per share = (net income - preferred dividend) / number of common shares.

here,

net income =$528,000.

preferred dividend =$200,000*4%=>$8,000

number of common shares = 220,000

Earnings per share = ($528,000-8,000) / 220,000

=>$2.36.

This Earnings per share is greater than Industry average of $2.36.

Price earnings ratio = Price per share / earnings per share

=>$36/ 2.36

=>15.25:1.

This Price earnings ratio is greater than industry ratio of 13.2:1.

2.Since EPS and Price earnings ratio are greater than industry average, we can invest in Morris's company.

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