Question

You are a new financial analyst for Acme Bank and Funeral Directors. You are looking at the following for a company you are considering for a loan. Sales = $650,000, their operating profit was $400,000, their interest expense = $35,000, the par value of their common stock was $20,000, the paid-in-capital in excess of par was $210,000 and they have 10,000 shares of common stock outstanding. Assume a 21% tax rate.

Given this information: What was the price of a share of common stock when it was sold (assume no flotation costs and they only sold stock once) ?
AND
If they had no preferred stock, what must have been their earnings per share?

Answer 1

calculation of earnings per share

Operating profit $400000

(-) Interest expense $35000

Profit before tax $365000

(-) Tax @ 21% $76650

Profit after tax    $288350 (total earnings)

Earnings per share = total earnings / number of shares outstanding

EPS = 288350/10000= 2.8835

outstanding shares = 10000

Calculation of price of the stock

par value or face value of the stock = $ 20000

(+) Paid in capital in excess of par     = $210000 (share premium)

total value of stock = $230000

price per share = total value / number of shares outstanding

= $ 230000/ 10000

= $ 23

Note : we can calculate the rate of return

100( eps/price per share) = (2.8835/23)*100= 12.54%

$23 can be consider as share price or we can add eps to the share so that we can consider $25.8835 ( assuming $ 23 is previous years values and ignoring all other matters like good will growth and divided payout etc)