
a)
Calculate the number of times interest earned for the year 2017 and 2018.
a)

Explanation of Solution
Times Interest Earned Ratio:
It is one of the solvency ratios. It is a measure to evaluate the net income for interest payment on debt of a company.
The calculation of the number of times interest earned in the year 2018 is as follows:
Hence, the number of times interest earned in the year 2018 is 9 times.
The calculation of the number of times interest earned in the year 2017 is as follows:
Hence, the number of times interest earned in the year 2017 is 9.38 times.
b)
Calculate the earnings per share based on the number of outstanding shares for the year 2017 and 2018.
b)

Explanation of Solution
Earnings per share:
Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock.
The calculation of earnings per share for the year 2018 is as follows:
Hence, the earning per share for the year 2018 is $8.
The calculation of earnings per share for the year 2017 is as follows:
Hence, the earning per share for the year 2017 is $7.20.
c)
Calculate the price-earnings ratio for the year 2017 and 2018.
c)

Explanation of Solution
Price/Earnings Ratio:
It depicts the relation of market price of a share to earnings per share of that company. The price/earnings ratio presents the market value of the amount invested to earn $1 by a company. It is major tool to be used by investors before the decisions related to investments in a company.
The calculation of price-earnings ratio for the year 2018 is as follows:
Hence, the price-earnings ratio for the year 2018 is 3.75 times.
The calculation of price-earnings ratio for the year 2017 is as follows:
Hence, the price-earnings ratio for the year 2017 is 3.33 times.
d)
Calculate the return on equity for the year 2017 and 2018.
d)

Explanation of Solution
Return on equity ratio:
The calculation of return on equity for the year 2018 is as follows:
Hence, the return on equity for the year 2018 is 38.78%.
The calculation of return on equity for the year 2017 is as follows:
Hence, the return on equity for the year 2017 is 40%.
Working note:
The calculation of average
Hence, the average stockholders’ equity for the year 2018 is $330,000. (1)
The calculation of average stockholders’ equity for the year 2017 is as follows:
Hence, the average stockholders’ equity for the year 2017 is $270,000. (2)
e)
Calculate the net margin for the year 2018 and 2017.
e)

Explanation of Solution
Net margin:
This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
The calculation of net margin in the year 2018 is as follows:
Hence, the net margin for the year 2018 is 12.80%.
The calculation of net margin in the year 2017 is as follows:
Hence, the net margin for the year 2017 is 13.50%.
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Chapter 13 Solutions
Fundamental Managerial Accounting Concepts
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