Question

Problem 3-29 Market Value Ratios [LO2]

Some recent financial statements for Smolira Golf Corp. follow.

  

SMOLIRA GOLF CORP. 2014 and 2015 Balance Sheets
Assets									Liabilities and Owners’ Equity
	2014				2015					2014				2015
Current assets									Current liabilities
Cash	$	24,086			$	24,500			Accounts payable	$	23,584			$	27,500
Accounts receivable		12,848				15,600			Notes payable		15,000				11,200
Inventory		26,042				27,500			Other		11,971				18,300
Total	$	62,976			$	67,600			Total	$	50,555			$	57,000
									Long-term debt	$	60,000			$	73,000
									Owners’ equity
									Common stock and paid-in surplus	$	44,000			$	44,000
									Accumulated retained earnings		237,116				256,000
Fixed assets
Net plant and equipment	$	328,695			$	362,400			Total	$	281,116			$	300,000
Total assets	$	391,671			$	430,000			Total liabilities and owners’ equity	$	391,671			$	430,000

SMOLIRA GOLF CORP. 2015 Income Statement
Sales					$	373,473
Cost of goods sold						254,500
Depreciation						32,800
Earnings before interest and taxes					$	86,173
Interest paid						14,700
Taxable income					$	71,473
Taxes (40%)						28,589
Net income					$	42,884
Dividends	$	24,000
Retained earnings		18,884

Smolira Golf Corp. has 40,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2015 was $30.

  

What is the price-earnings ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

  

Price-earnings ratio

times

  

What are the dividends per share? (Round your answer to 2 decimal places, e.g., 32.16.)

  

Dividends

per share

  

What is the market-to-book ratio at the end of 2015? (Round your answer to 2 decimal places, e.g., 32.16.)

  

Market-to-book ratio

times

   

If the company’s growth rate is 7 percent, what is the PEG ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

  

PEG ratio

times

Answer 1

Compute the earnings per share (EPS), using the equation as shown below:

EPS = Increase in retained earnings/ Shares outstanding

        = $18,884/ 40,000 shares

       = 0.4721

Hence, the earnings per share is $0.4721.

Compute the price-earnings ratio, using the equation as shown below:

Price-earnings ratio = Market price/ Earnings per share

                                = $30/ $0.4721

                                = 63.5458589281 times   

Hence, the price-earnings ratio is 63.55 times.

Compute the dividend per share, using the equation as shown below:

Dividend per share = Dividends/ Shares outstanding

                                = $24,000/ 40,000 shares

                                = $0.60

Hence, the dividend per share is 0.60 per share.

Compute the book value per share, using the equation as shown below:

Book value per share = Total shareholders’ equity/ Shares outstanding

                                   = $281,116/ 40,000

                                   = $7.0279

Hence, the book value per share is $7.0279.

Compute the market-book ratio, using the equation as shown below:

Market-book ratio = Share price/ Book value per share

                             = $30/ $7.0279

                             = 4.27 times

Hence, the market-book ratio is 4.27 times.

Compute the PEG ratio, using the equation as shown below:

PEG ratio = Price-earnings ratio/ Growth rate

                 = 63.5458589281 times/ 7%

= 907.80 times

Hence, the PEG ratio is 907.80 times.