Chapter 3, Problem 18P

a)

Summary Introduction

To determine: Earnings per share.

Explanation of Solution

Calculation of EPS:

$\begin{array}{c}\text{EPS}=\frac{\text{EAT}}{\left(\text{Average}\text{number}\text{of}\text{shares}\text{outstanding}\right)}\\ =\frac{\$21,000,000}{\left(5,000,000\right)}\\ =\$4.20\end{array}$

Hence, Earnings per share (EPS) is $4.20

b)

Summary Introduction

To determine: Price-to-earnings ratio.

Explanation of Solution

Calculation of price-to-earnings ratio:

$\begin{array}{c}\text{Price-to-earnings}\text{ratio}=\frac{\text{Market}\text{price}}{\text{EPS}}\\ =\frac{\$32}{\$4.20}\\ =\$7.6\end{array}$

Hence, price earnings ratio is $7.6.

c)

Summary Introduction

To determine: Book value per share.

Explanation of Solution

Calculation of book value per share:

$\begin{array}{c}\text{Book}\text{value per share}=\frac{\left(\begin{array}{l}\text{Common}\text{stock}+\text{contributed}\text{capital}\text{in}\text{excess}\text{of}\text{par}\\ \text{value}+\text{Retained}\text{earnings}\end{array}\right)}{\text{Average}\text{number}\text{of}\text{shares}\text{outstanding}}\\ =\frac{\left(\$5,000,000+\$20,000,000+\$55,000,000\right)}{5,000,000}\\ =\$16\end{array}$

Hence, book value per share is $16

d)

Summary Introduction

To determine: Market-to-book ratio.

Explanation of Solution

Calculation of market-to-book ratio:

$\begin{array}{c}\text{Market to book ratio}=\frac{\$32}{\$16}\\ =2.0\end{array}$

Hence, book value per share is $16

e)

Summary Introduction

To determine: EV-EBITDA multiple.

Explanation of Solution

Calculation of EV-EBITDA multiple:

EV is nothing but the enterprise value

$\text{EV}=\text{Market}\text{value}\text{of}\text{equity}+\text{Market}\text{value}\text{of}\text{debt}$

$\begin{array}{c}\text{Market}\text{value}\text{of}\text{equity}=\text{Market}\text{value}\text{of}\text{stock}\times \text{ Number of shares outstanding}\\ =\text{\$32}\times \text{5 million}\\ =\text{\$160 million}\end{array}$

$\begin{array}{c}\text{Market}\text{value}\text{of}\text{debt}=\text{Long term debt}+\text{current liabilities}\\ =\text{\$40}+\text{\$30}\\ =\text{\$70 million}\end{array}$

Calculation of enterprise value:

$\begin{array}{c}\text{EV}=\text{Market}\text{value}\text{of}\text{equity}+\text{Market}\text{value}\text{of}\text{debt}\\ =\$160\text{million}+\$70\text{million}\\ =\$230\text{million}\end{array}$

Hence, enterprise value is $230 million

Calculation of EBITDA:

$\begin{array}{c}\text{EBITDA}=\text{EBIT}+\text{Depreciation}\\ =\$40\text{million}+\$10\text{million}\\ =\$50\text{million}\end{array}$

Hence, EBITDA is $50 million

Calculation of EV-EBITDA multiple:

$\begin{array}{c}\text{EV-EBITDA multiple}=\frac{\$230\text{million}}{\$50\text{million}}\\ =4.6\text{times}\end{array}$

Hence, EV-EBITDA multiple is 4.6 times

f)

Summary Introduction

To determine: Addition to retained earnings.

Explanation of Solution

Calculation of additions to retained earnings:

$\begin{array}{c}\text{Additions to retained earnings}=\text{Net}\text{income}-\text{dividends}\\ =\$21\text{million}-\$10\text{million}\\ =\$11\text{million}\end{array}$

Hence, additions to retained earnings are $11million.

g)

Summary Introduction

To construct: New balance sheet of Company E.

Explanation of Solution

Excel spreadsheet:

Excel workings: