Question

1. The price-earnings ratio P/E is the ratio (market value of one share)/(earnings per share). If P/E increases by 19% and the earnings per share decrease by 9%, determine the percentage change in the market value. Round your answer to the nearest percentage point.

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2. To produce each product unit, the company spends $1.75 on material and $2.95 on labor. Its total fixed cost is $9000. Each unit sells for $6.15. What is the smallest number of units that must be sold for the company to realize a profit?

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3. A company produces coffee makers. The labor cost of assembling one coffee maker during the regular business hours is $2.95. If the work is done in overtime, the labor cost is $3.75 per unit. The company must produce 800 coffee makers this week, and does not want to spend more than $2504 in labor costs. What is the smallest number of units that must be assembled during the regular hours?

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4. The current ratio (assets/liabilities) of company X is 3.5.
-> a. Given that the current assets are $245000, find the current liabilities.

The board of directors determines that the current ratio must never be below 2.6.
-> b. What is the maximum amount that the company can borrow?

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Thorough explanation for all questions please. Thank you!

Answer 1

Answer 1.
P/E Ratio = Market Price of a Share / EPS
Therefore,
119% = Market Price of Share / 91%										119%
Market Price Per Share = 108.29%										91%
% Change in Market Price Per Share = 8.29% (108.29% - 100%)										108.290%
Answer 2.
Contribution Margin Per Unit = $6.15 - ($1.75 + $2.95)
Contribution Margin Per Unit = $1.45 per Unit
At Break Even point = Profit is Nil
BEP (In Units) = Fixed Costs / Contribution per Unit
BEP (In Units) = $9,000 / $1.45
BEP (In Units) = 6,206.89 or say 6,207 Units
So, any sales above 6,207 units, the company will have profits.
Smallest Number of Units to be sold to realize the Profit = 6,208 Units
Answer 3.
Smallest Number of Units assembled during the Regular Hours = $2,504 (Labor Costs) / $2.95 (Labor cost per unit)
Smallest Number of Units assembled during the Regular Hours = 848.81 units or say 848 Units
Answer 4-a.
Current Ratio = Current Assets / Current Liabilities
Therefore,
3.50 = $245,000 / Current Liabilities
Current Liabilities = $245,000 / 3.50
Current Liabilities = $70,000
Answer 4-b.
Current Ratio = Current Assets / Current Liabilities
Therefore,
2.60 = $245,000 / Current Liabilities
Current Liabilities = $245,000 / 2.6
Current Liabilities = $94,230.77 = (Maximum Amt. Company can borrow)