Chapter 13, Problem 24PSA

a)

To determine

Calculate the working capital for the year 2015 and 2014.

Explanation of Solution

Working capital:

Working capital refers to the excess amount of current assets over its current liabilities of a business. It measures the excess funds that are required for the companies to carry out their day to day operations, excluding any new funds that have been invested during the year. Working capital is calculated by using the formula:

  $\text{Working capital}=\text{ Current assets}-\text{Current liabilities }$

The calculation of working capital for the year 2015 is as follows:

$\begin{array}{c}\text{Working capital}=\text{ Current assets}-\text{Current liabilities }\\ =\$250,000-\$151,800\\ =\$98,200\end{array}$

Hence, the working capital for the year 2015 is $98,200.

The calculation of working capital for the year 2014 is as follows:

$\begin{array}{c}\text{Working capital}=\text{ Current assets}-\text{Current liabilities }\\ =\$217,000-\$121,000\\ =\$96,000\end{array}$

Hence, the working capital for the year 2014 is $96,000.

b)

To determine

Calculate the working capital for the year 2015 and 2014.

Explanation of Solution

Current ratio:

Current ratio is one of the liquidity ratios, which measures the capacity of the company to meet its short-term obligations using its current assets. Current ratio is calculated by using the formula:

  $\text{Current ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}$

The calculation of current ratio for the year 2015 is as follows:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ =\frac{\$250,000}{\$151,800}\\ =1.65:1\end{array}$

Hence, the current assets for the year 2015 is 1.65:1.

The calculation of current ratio for the year 2014 is as follows:

$\begin{array}{c}\text{Current ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ =\frac{\$217,000}{\$121,000}\\ =1.79:1\end{array}$

Hence, the current assets for the year 2014 is 1.79:1.

c)

To determine

Calculate the quick ratio for the year 2015 and 2014.

Explanation of Solution

Quick Ratio:

It is a ratio used to determine a company’s ability to pay back its current liabilities. Liquid assets that are current assets except inventory and prepaid expenses.

$\text{Quick Ratio}\text{=}\frac{\text{Quick}\text{Assets}}{\text{Current}\text{Liabilities}}$

The calculation of quick ratio for the year 2015 is as follows:

$\begin{array}{c}\text{Quick Ratio}\text{=}\frac{\text{Quick}\text{Assets}}{\text{Current}\text{Liabilities}}\\ =\frac{\$90,000(1)}{\$151,800}\\ =0.59:1\end{array}$

Hence, the quick ratio for the year 2015 is 0.59:1.

The calculation of quick ratio for the year 2014 is as follows:

$\begin{array}{c}\text{Quick Ratio}\text{=}\frac{\text{Quick}\text{Assets}}{\text{Current}\text{Liabilities}}\\ =\frac{\$64,000(2)}{\$121,000}\\ =0.53:1\end{array}$

Hence, the quick ratio for the year 2014 is 0.53:1.

Working note:

The calculation of quick assets for the year 2015 is as follows:

$\begin{array}{c}\text{Quick assets}=\text{Current}\text{Assets}-\text{Inventory}-\text{Prepaid expenses}\\ =\$250,000-\$135,000-\$25,000\\ =\$90,000\end{array}$

Hence, the quick assets is $90,000.

…… (1)

The calculation of quick assets for the year 2014 is as follows:

$\begin{array}{c}\text{Quick assets}=\text{Current}\text{Assets}-\text{Inventory}-\text{Prepaid expenses}\\ =\$217,000-\$143,000-\$10,000\\ =\$64,000\end{array}$

Hence, the quick assets is $64,000.

…… (2)

d)

To determine

Calculate the receivables turnover for the year 2015 and 2014.

Explanation of Solution

Receivables turnover ratio:

 Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return.

  $\text{Receivables turnover}=\frac{\text{}\text{Net credit sales}}{\text{Average accounts receivables}}$

The calculation of receivables turnover for the year 2015 is as follows:

$\begin{array}{c}\text{Receivables turnover}=\frac{\text{}\text{Net credit sales}}{\text{Average accounts receivables}}\\ =\frac{\$230,000}{\$50,000(3)}\\ =4.60\text{ times}\end{array}$

Hence, the receivables turn over for the year 2015 is 4.60 times.

The calculation of receivables turnover for the year 2014 is as follows:

$\begin{array}{c}\text{Receivables turnover}=\frac{\text{}\text{Net credit sales}}{\text{Average accounts receivables}}\\ =\frac{\$210,000}{\$46,500(4)}\\ =4.52\text{ times}\end{array}$

Hence, the receivable turnover for the year 2014 is 4.52 times.

Working note:

The calculation of average accounts receivable for the year 2015 is as follows:

$\begin{array}{c}\text{Average accounts receivable}=\frac{\left(\begin{array}{l}\text{Ending Net }\\ \text{Receivables}\end{array}\right)+\left(\begin{array}{l}\text{Beginning Net }\\ \text{Receivables}\end{array}\right)}{2}\\ =\frac{\$54,000+\$46,000}{2}\\ =\frac{\$100,000}{2}\\ =\$50,000\end{array}$

Hence, the average account receivable is $50,000.

…… (3)

The calculation of average accounts receivable for the year 2014 is as follows:

$\begin{array}{c}\text{Average accounts receivable}=\frac{\left(\begin{array}{l}\text{Ending Net }\\ \text{Receivables}\end{array}\right)+\left(\begin{array}{l}\text{Beginning Net }\\ \text{Receivables}\end{array}\right)}{2}\\ =\frac{\$46,000+\$47,000}{2}\\ =\frac{\$93,000}{2}\\ =\$46,500\end{array}$

Hence, the average account receivable is $46,500.

…… (4)

e)

To determine

Calculate the average days to collect accounts receivable for the year 2015 and 2014.

Explanation of Solution

Average days to collect accounts receivable:

This ratio is used to determine the number of days a particular company takes to collect accounts receivables. It is calculated by using the formula:

  $\begin{array}{l}\text{Average days to collect}\\ \text{ accounts receivable}\end{array}\}=\frac{\text{365}}{\text{Receivables turnover}}$

The calculation of average days to collect accounts receivable for the year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Average days to collect}\\ \text{ accounts receivable}\end{array}\}=\frac{\text{365}}{\text{Receivables turnover (d)}}\\ =\frac{365}{4.60}\\ =79\text{ days}\end{array}$

Hence, the average days to collect accounts receivable for the year 2015 is 79 days.

The calculation of average days to collect accounts receivable for the year 2014 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Average days to collect}\\ \text{ accounts receivable}\end{array}\}=\frac{\text{365}}{\text{Receivables turnover (d)}}\\ =\frac{365}{4.52}\\ =81\text{ days}\end{array}$

Hence, the average days to collect accounts receivable for the year 2014 is 81 days.

f)

To determine

Calculate the inventory turnover for the year 2015 and 2014.

Explanation of Solution

Inventory Turnover Ratio:

This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period. It is calculated by using the formula:

  $\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

The calculation of inventory turnover ratio for the year 2015 is as follows:

$\begin{array}{c}\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\frac{\$120,000}{\$139,000(5)}\\ =0.86\text{ times}\end{array}$

Hence, the inventory turnover ratio for the year 2015 is 0.86 times.

The calculation of inventory turnover ratio for the year 2014 is as follows:

$\begin{array}{c}\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\frac{\$103,000}{\$141,500(6)}\\ =0.73\text{ times}\end{array}$

Hence, the inventory turnover ratio for the year 2014 is 0.73 times.

Working note:

The calculation of average inventory for the year 2015 is as follows:

$\begin{array}{c}\text{Average inventory}=\frac{\left(\begin{array}{l}\text{Ending }\\ \text{Inventory}\end{array}\right)+\left(\begin{array}{l}\text{Beginning}\\ \text{ Inventory}\end{array}\right)}{2}\\ =\frac{\$135,000+\$143,000}{2}\\ =\frac{\$278,000}{2}\\ =\$139,000\end{array}$

Hence, the average inventory is $139,000.

…… (5)

The calculation of average inventory for the year 2014 is as follows:

$\begin{array}{c}\text{Average inventory}=\frac{\left(\begin{array}{l}\text{Ending }\\ \text{Inventory}\end{array}\right)+\left(\begin{array}{l}\text{Beginning}\\ \text{ Inventory}\end{array}\right)}{2}\\ =\frac{\$143,000+\$140,000}{2}\\ =\frac{\$283,000}{2}\\ =\$141,500\end{array}$

Hence, the average inventory is $141,500.

…… (6)

g)

To determine

Calculate the number of days to sell inventory for the year 2015 and 2014.

Explanation of Solution

Numbers of days to sell inventory:

This ratio is determined as the number of days a particular company takes to make sales of the inventory available with them. It is calculated by using the formula:

  $\begin{array}{l}\text{Numbers of days }\\ \text{to sell inventory}\end{array}\}=\frac{\text{365}}{\text{Inventory turnover}}$

The calculation of numbers of days to sell inventory for the year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Numbers of days }\\ \text{to sell inventory}\end{array}\}=\frac{\text{365}}{\text{Inventory turnover (f)}}\\ =\frac{365}{0.86}\\ =424\text{ days}\end{array}$

Hence, the numbers of days to sell inventory for the year 2015 is 424 days.

The calculation of numbers of days to sell inventory for the year 2014 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Numbers of days }\\ \text{to sell inventory}\end{array}\}=\frac{\text{365}}{\text{Inventory turnover (f)}}\\ =\frac{365}{0.73}\\ =500\text{ days}\end{array}$

Hence, the numbers of days to sell inventory for the year 2014 is 500 days.

h)

To determine

Calculate the debt to asset ratio for the year 2015 and 2014.

Explanation of Solution

Debt to assets ratio:

The debt to asset ratio shows the relationship between total asset and the total liability of the company. Debt ratio reflects the financial strategy of the company. It is used to measure the percentage of company’s assets that are financed by long term debts.  Debt to assets ratio is calculated by using the formula:

  $\text{Debt-to-assets ratio}=\frac{\text{Total Liabilities}}{\text{Total Assets }}$

The calculation of debt to assets ratio for the year 2015 is as follows:

$\begin{array}{c}\text{Debt-to-assets ratio}=\frac{\text{Total Liabilities}}{\text{Total Assets }}\\ =\frac{\$283,800}{\$576,000}\\ =49\%\end{array}$

Hence, the debt to assets ratio for the year 2015 is 49%.

The calculation of debt to assets ratio for the year 2014 is as follows:

$\begin{array}{c}\text{Debt-to-assets ratio}=\frac{\text{Total Liabilities}}{\text{Total Assets }}\\ =\frac{\$248,000}{\$576,000}\\ =48\%\end{array}$

Hence, the debt to assets ratio for the year 2014 is 48%.

i)

To determine

Calculate the debt to asset ratio for the year 2015 and 2014.

Explanation of Solution

Debt to equity ratio:

The debt-to-equity ratio indicates that the company’s debt as a proportion of its stockholders’ equity. The debt-to-equity ratio is calculated using the formula:

  $\text{Debt-to-equity ratio}=\frac{\text{Total liabilities}}{\text{Total stockholders' equity}}$

The calculation of debt to equity ratio for the year 2015 is as follows:

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total liabilities}}{\text{Total stockholders' equity}}\\ =\frac{\$283,800}{\$292,200}\\ =0.97:1\end{array}$

Hence, the debt to equity ratio for the year 2015 is 0.97:1.

The calculation of debt to equity ratio for the year 2014 is as follows:

$\begin{array}{c}\text{Debt-to-equity ratio}=\frac{\text{Total liabilities}}{\text{Total stockholders' equity}}\\ =\frac{\$248,000}{\$268,000}\\ =0.93:1\end{array}$

Hence, the debt to equity ratio for the year 2014 is 0.93:1.

j)

To determine

Calculate the number of times interest earned for the year 2015 and 2014.

Explanation of Solution

Number of times interest was earned:

Number of times interest is earned quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.

$\begin{array}{l}\text{Number of times }\\ \text{interest is earned}\end{array}\}=\frac{\text{Earnings before interest and taxes expense}}{\text{Interest expense}}$

The calculation of number of times interest earned for the year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Number of times }\\ \text{interest is earned}\end{array}\}=\frac{\text{Earnings before interest and taxes expense}}{\text{Interest expense}}\\ =\frac{\$63,000\left(7\right)}{\$8,000}\\ =7.88\text{ times}\end{array}$

Hence, the number of times interest earned for the year 2015 is 7.88 times.

The calculation of number of times interest earned for the year 2014 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Number of times }\\ \text{interest is earned}\end{array}\}=\frac{\text{Earnings before interest and taxes expense}}{\text{Interest expense}}\\ =\frac{\$62,000\left(8\right)}{\$7,200}\\ =8.61\text{ times}\end{array}$

Hence, the number of times interest earned for the year 2014 is 8.61 times.

Working Note:

The calculation of earnings before interest and expenses for the year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Earnings before income }\\ \text{tax and interest}\end{array}\}=\left(\begin{array}{l}\text{Earnings }\\ \text{after tax}\end{array}\right)+\left(\begin{array}{l}\text{Interest}\\ \text{ expense}\end{array}\right)+\left(\begin{array}{l}\text{Tax}\\ \text{ expense}\end{array}\right)\\ =\$32,000+\$8,000+\$23,000\\ =\$63,000\end{array}$ (7)

The calculation of earnings before interest and expenses for the year 2014 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Earnings before income }\\ \text{tax and interest}\end{array}\}=\left(\begin{array}{l}\text{Earnings }\\ \text{after tax}\end{array}\right)+\left(\begin{array}{l}\text{Interest}\\ \text{ expense}\end{array}\right)+\left(\begin{array}{l}\text{Tax}\\ \text{ expense}\end{array}\right)\\ =\$32,800+\$7,200+\$22,000\\ =\$62,000\end{array}$ (8)

k)

To determine

Calculate the plant assets to long-term debt for the year 2015 and 2014.

Explanation of Solution

Plant assets to long-term debt:

Plant assets to long-term debt ratio measure the value of assets per each dollar of long-term liabilities. It is calculated by using the formula:

  $\begin{array}{l}\text{Plant assets to }\\ \text{long term debt}\end{array}\}=\frac{\text{Plant assets}}{\text{Long term liabilities}}$

The calculation of plant assets to long-term debt for the year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Plant assets to }\\ \text{long term debt}\end{array}\}=\frac{\text{Plant assets}}{\text{Long term liabilities}}\\ =\frac{\$270,000}{\$132,000}\\ =2.05:1\end{array}$

Hence, the plant assets to long-term debt for the year 2015 is 2.05:1.

The calculation of plant assets to long-term debt for the year 2014 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Plant assets to }\\ \text{long term debt}\end{array}\}=\frac{\text{Plant assets}}{\text{Long term liabilities}}\\ =\frac{\$255,000}{\$127,000}\\ =2.01:1\end{array}$

Hence, the plant assets to long-term debt for the year 2014 is 2.01:1.

l)

To determine

Calculate the net margin for the year 2015 and 2014.

Explanation of Solution

Net margin:

It is one of the profitability ratios. Profit margin ratio is used to measure the percentage of net income that is being generated per dollar of revenue or sales.

  $\text{Net margin}=\frac{\text{Net income}}{\text{Net sales}}$

The calculation of net margin for the year 2015 is as follows:

$\begin{array}{c}\text{Net margin}=\frac{\text{Net income}}{\text{Net sales}}\\ =\frac{\$32,000}{\$230,000}\\ =13.91\%\end{array}$

Hence, the net margin for the year 2015 is 13.91%.

The calculation of net margin for the year 2014 is as follows:

$\begin{array}{c}\text{Net margin}=\frac{\text{Net income}}{\text{Net sales}}\\ =\frac{\$32,800}{\$210,000}\\ =15.61\%\end{array}$

Hence, the net margin for the year 2014 is 15.61%.

m)

To determine

Calculate the turnover of assets for the year 2015 and 2014.

Explanation of Solution

Turnover of assets:

Turnover of assets is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total assets. Turnover of assets is calculated as follows:

  $\text{Turnover of assets}=\frac{\text{Net sales }}{\text{Average total assets}}$

The calculation of turnover of assets for the year 2015 is as follows:

$\begin{array}{c}\text{Turnover of assets}=\frac{\text{Net sales }}{\text{Average total assets}}\\ =\frac{\$230,000}{\$546,000\left(9\right)}\\ =0.42\end{array}$

Hence, the turnover of assets for the year 2015 is 0.42.

The calculation of turnover of assets for the year 2014 is as follows:

$\begin{array}{c}\text{Turnover of assets}=\frac{\text{Net sales }}{\text{Average total assets}}\\ =\frac{\$210,000}{\$516,000}\\ =0.41\end{array}$

Hence, the turnover of assets for the year 2014 is 0.41.

Working note:

The calculation of amount of average total assets for year 2015.

$\begin{array}{c}\text{Average total assets =}\frac{\left(\begin{array}{l}\text{Ending }\\ \text{total assets}\end{array}\right)+\left(\begin{array}{l}\text{Beginning }\\ \text{total assets}\end{array}\right)}{2}\\ =\frac{\$576,000+\$516,000}{2}\\ =\frac{\$1,092,000}{2}\\ =\$546,000\end{array}$

Hence, the average total assets for the year 2015 is $546,000.

…… (9)

n)

To determine

Calculate the return on investment for the year 2015 and 2014.

Explanation of Solution

Return on investments (assets):

Return on investments (assets) is the financial ratio, which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings with relative to its total assets. Return on investment is calculated as follows:

  $\text{Return on investments}=\frac{\text{Net income }}{\text{Average total assets}}$

The calculation of return on investment for the year 2015 is as follows:

$\begin{array}{c}\text{Return on investments}=\frac{\text{Net income }}{\text{Average total assets}}\\ =\frac{\$32,000}{\$546,000\left(9\right)}\\ =5.86\%\end{array}$

Hence, the return on investment for the year 2015 is 5.86%.

The calculation of return on investment for the year 2014 is as follows:

$\begin{array}{c}\text{Return on investments}=\frac{\text{Net income }}{\text{Average total assets}}\\ =\frac{\$32,800}{\$516,000}\\ =6.36\%\end{array}$

Hence, the return on investment for the year 2014 is 6.36%.

o)

To determine

Calculate the return on equity for the year 2015 and 2014.

Explanation of Solution

Return on equity ratio:

It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on equity is as follows:

  $\text{Return on equity}=\frac{\text{Net income}}{\text{Average stockholders' equity}}\times 100$

The calculation of return on equity for the year 2015 is as follows:

$\begin{array}{c}\text{Return on equity}=\frac{\text{Net income}}{\text{Average stockholders' equity}}\times 100\\ =\frac{\$32,000}{\$208,100\left(10\right)}\\ =11.4\%\end{array}$

Hence, the return on equity for the year 2015 is 11.4%.

The calculation of return on equity for the year 2014 is as follows:

$\begin{array}{c}\text{Return on equity}=\frac{\text{Net income}}{\text{Average stockholders' equity}}\times 100\\ =\frac{\$32,800}{\$268,000}\\ =12.2\%\end{array}$

Hence, the return on equity for the year 2014 is 12.2%.

Working notes:

The calculation of average total stockholders’ equity for Year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Average total }\\ \text{stockholders' equity }\end{array}\}\text{=}\frac{\left(\begin{array}{l}\text{Ending total }\\ \text{stockholders' equity}\end{array}\right)+\left(\begin{array}{l}\text{Beginning total }\\ \text{stockholders' equity}\end{array}\right)}{2}\\ =\frac{\$292,200+\$268,000}{2}\\ =\frac{\$560,200}{2}\\ =\$280,100\end{array}$

Hence, the average total stockholders’ equity is $280,100.

…… (10)

p)

To determine

Calculate the earnings per share for the year 2015 and 2014.

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.

  $\text{Earnings per share}=\frac{\text{Net earnings available for common stock}}{\text{Average number of outstanding common shares}}$

The calculation of earnings per share for the year 2015 is as follows:

$\begin{array}{c}\text{Earnings per share}=\frac{\text{Net earnings available for common stock}}{\text{Average number of outstanding common shares}}\\ =\frac{\$32,000-\$3,200}{10,000\text{ shares}}\\ =\$2.88\text{ per share}\end{array}$

Hence, the earnings per share for the year 2015 is $2.88 per share.

The calculation of earnings per share for the year 2014 is as follows:

$\begin{array}{c}\text{Earnings per share}=\frac{\text{Net earnings available for common stock}}{\text{Average number of outstanding common shares}}\\ =\frac{\$32,800-\$3,200}{10,000\text{ shares}}\\ =\$2.96\text{ per share}\end{array}$

Hence, the earnings per share for the year 2014 is $2.96 per share.

q)

To determine

Calculate the book value per share of common stock.

Explanation of Solution

Book value per share of common stock:

This ratio is a measure of a share of common stock that is used to determine the value of per share based on the equity available to the common stockholders. This ratio is calculated by using the formula:

  $\begin{array}{l}\text{Book value per share }\\ \text{of common stock}\end{array}\}\text{=}\frac{\text{Stockholders' equity}-\text{Preferred stock }}{\text{Outstanding common shares}}$

The calculation of book value per share for the year 2015 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Book value per share }\\ \text{of common stock}\end{array}\}\text{=}\frac{\text{Stockholders' equity}-\text{Preferred stock }}{\text{Outstanding common shares}}\\ =\frac{\$292,200-\$80,000}{10,000\text{ shares}}\\ =\$21.22\text{ per share}\end{array}$

Hence, the book value per share for the year 2015 is $21.22 per share.

The calculation of book value per share for the year 2014 is as follows:

$\begin{array}{c}\begin{array}{l}\text{Book value per share }\\ \text{of common stock}\end{array}\}\text{=}\frac{\text{Stockholders' equity}-\text{Preferred stock }}{\text{Outstanding common shares}}\\ =\frac{\$268,000-\$80,000}{10,000\text{ shares}}\\ =\$18.80\text{ per share}\end{array}$

Hence, the book value per share for the year 2014 is $18.80 per share.

r)

To determine

Calculate the price-earnings ratio for the year 2015 and 2014.

Explanation of Solution

Price/Earnings Ratio:

The price/earnings ratio shows the market value of the amount invested to earn $1 by a company. It is major tool used by investors for making decisions related to the investment in a company.

$\text{Price/Earnings Ratio}\text{=}\frac{\text{Market Price per Share }}{\text{Earnings per Share}}$

The calculation of price-earnings ratio for the year 2015 is as follows:

$\begin{array}{c}\text{Price/Earnings Ratio}\text{=}\frac{\text{Market Price per Share }}{\text{Earnings per Share (p)}}\\ =\frac{\$12.50}{\$2.88}\\ =\$4.34\end{array}$

Hence, the price-earnings ratio for the year 2015 is $4.34 per share.

The calculation of price-earnings ratio for the year 2014 is as follows:

$\begin{array}{c}\text{Price/Earnings Ratio}\text{=}\frac{\text{Market Price per Share }}{\text{Earnings per Share (p)}}\\ =\frac{\$11.75\left(\text{Given}\right)}{\$2.96}\\ =\$3.96\end{array}$

Hence, the price-earnings ratio for the year 2014 is $3.96 per share.

s)

To determine

Calculate the dividend yield on common stock.

Explanation of Solution

Dividend yield on common stock:

Dividend yield ratio indicates how much percentage of share prices a company pays out in the form of dividends price. The formula to calculate the dividend yield percentage is as follows:

$\text{Dividend yield=}\frac{\text{Dividends per Share }}{\text{Market Price per Share}}$

The calculation of yield on common stock for the year 2015 is as follows:

$\begin{array}{c}\text{Dividend yield=}\frac{\text{Dividends per Share }}{\text{Market Price per Share}}\\ =\frac{\$0.46\left(11\right)}{\$12.50}\\ =3.68\%\end{array}$

Hence, the yield on common stock for the year 2015 is 3.68%.

The calculation of yield on common stock for the year 2014 is as follows:

$\begin{array}{c}\text{Dividend yield=}\frac{\text{Dividends per Share }}{\text{Market Price per Share}}\\ =\frac{\$0.46\left(12\right)}{\$11.75}\\ =3.91\%\end{array}$

Hence, the yield on common stock for the year 2014 is $3.91%.

Working notes:

 The calculation of dividends per share for Year 2015 is as follows:

$\begin{array}{c}\text{Dividends per share}=\frac{\text{Common stock dividends}}{\text{Number of shares outstanding}}\\ =\frac{\$4,600}{10,000\text{ shares}}\\ =\$0.46\end{array}$

Hence, the dividend per share for the year 2015 is $0.46.

…… (11)

The calculation of dividends per share for Year 2014 is as follows:

$\begin{array}{c}\text{Dividends per share}=\frac{\text{Common stock dividends}}{\text{Number of shares outstanding}}\\ =\frac{\$4,600}{10,000\text{ shares}}\\ =\$0.46\end{array}$

Hence, the dividend per share for the year 2014 is $0.46

…… (12)