Question

For 2015, Willis Corporation reported after-tax net income of $550,000. During the year, the number of...

For 2015, Willis Corporation reported after-tax net income of $550,000. During the year, the number of outstanding shares of 6% $100 par preferred stock remained constant at 3,000, and 200,000 shares of common stock were outstanding all year. The company's total stockholders' equity at December 31, 2015, was $6,500,000. Willis's common stock was selling at $28 per share at the end of the year. All dividends for the year were paid, including a dividend of $1.50 per share to common stockholders. Round your percentage to two decimal places. (e.g., .1562 as 15.62%)

**i don't need this to be written for me, i just need a few short answers to the following to get me going:

  • Justify whether or not you would invest in this company.
  • Incorporate the computations you performed to rationalize your decision.

Below are my calculations:

  • Earnings per share 550,000-18000/200000=$2.66
  • Book value per share of common stock 6500000-200000/200000=$31.5
  • Price-earnings ratio 28/2.66=$10.53
  • Dividend yield 1.50/28=5.36
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Homework Answers

Answer #1

The support calculations done by you are correct with respect of earnings per share, price earning ratio and dividend yield.

However, the book value pre share is not correct.

The Stockholders' equity at at December 31 = $ 6,500,000
(-) Preference shares (3000*100) ( $ 300,000)

Book value for common shareholders = $ 6,200,000
No. of common shares outstanding 200,000
Book Value per share = (6200000/200000) = $ 31.00 per share

The investor may note that the book value of share is higher than that of the market value per share. So, the investor is getting high worth share at lower price in the market.

Hence, it may be desirable to invest in this company at the share price of $ 28.

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