Silva Company reported these figures for 2018 and 2017. 2018 2017
Income Statement-partial
Net Income 34,800 $17,000
Dec. 31, 2018 Dec. 31, 2017
Balance Sheet-partial:
Total Assets 280,000 200,000
Paid-In Capital:
Preferred Stock-6%, $10 Par Value,
90,000 shares $80,000 $80,000
authorized, 8,000 shares issued and outstanding
Common Stock-$1 Par Value;
75,000 shares 60,000 60,000
authorized; 60,000 shares issued and outstanding
Paid-In Capital in Excess of Par-Common 10,000 10,000
65,000 35,000
Retained Earnings
Total Stockholders' Equity 215,000 185,000
Requirement
1. Compute Silva CompanyD's earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018.
Assume the Income Statement-partial company paid the minimum preferred dividend during 2018.
2. Compute Silva Company's price/earnings ratio for 2018. Assume the Dec. 31, 2018 ec. 31, 2017 Round to two company 's market price per share of common stock is $7.
3. Compute Silva CompanyD's rate of return on common stockholders' equity for 2018. Assume the company paid the minimum preferred dividend during 2018.

Silva Company

1. Computation of Earnings per share for 2018, assuming the company paid the minimum preferred dividend during 2018:

Earnings per share (EPS) = Net Income/Outstanding common shares

= $34,800/60,000 = $0.58

2. Computation of price/earnings ratio for 2018, market price is $7

Price/Earnings ratio = Market price/EPS = $7/$0.58 = 12.07

3. Computation of rate of return on common stockholders' equity for 2018, assuming the company paid the minimum preferred dividend during 2018:

Rate of return on common stockholders' equity = Net Income/ Common Stockholders' equity  x  100

= $34,800/($215,000 - 80,000) x 100 = 25.78%

Explanation:

a) Data

1) Income Statement-partial

                       2018    2017

Net Income $34,800   $17,000

2) Balance Sheet-partial:

                                 Dec. 31, 2018        Dec. 31, 2017

Total Assets                280,000            200,000

Paid-In Capital:

Preferred Stock-6%, $10 Par Value,

90,000 shares authorized,

8,000 shares issued and outstanding   $80,000            $80,000

Common Stock-$1 Par Value;

75,000 shares authorized;

60,000 shares issued and outstanding    60,000             60,000

Paid-In Capital in Excess of Par-Common 10,000              10,000

Retained Earnings                                      65,000             35,000

Total Stockholders' Equity                       215,000            185,000

b) Earnings per share:  This is the net income divided by the number of common stock shares outstanding.  It indicates how profitable a company is, especially with regard to the outstanding common stock shares.

c) Price/Earnings ratio:  This is a ratio of the market price of common stock over the earnings per share.  It is used to place a value on a company and to know if the share is overvalued or undervalued.

d) Rate of Return on common stockholders' equity: This is the ratio of net income available for common stockholders over the value of common stockholders' equity.  Common Stockholders' equity is Equity less preferred stockholders' equity.

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