The requried rate of return is 14% 1. What is the ROE ratio for 2005? 2. What is
ID: 2773407 • Letter: T
Question
The requried rate of return is 14%
1. What is the ROE ratio for 2005?
2. What is the P/E ratio for 2005?
Income Statement 2005 Sales $8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net income $660,000 EPS $5.08 Dividends per share $3.05 Balance Sheet 2005 Cash $200,000 Accounts receivable 1,200,000 Inventory 1,840,000 Total current assets 3,240,000 Fixed assets 3,200,000 Total assets $6,440,000 Accounts payable 800,000 Bank loan 600,000 Total current liabilities 1,400,000 Bonds payable 900,000 Total liabilities 2,300,000 Common stock(130,000 shares) 300,000 Retained earnings 3,840,000 Total Equity 4,400,000 Total liabilities & equity $6,440,000Explanation / Answer
1)
ROE for 2015:
= Net income÷total equity
= 660000÷4400000
= 15%
2)
Price = 3.05÷14% = $21.79
EPS = Net income to common stockholders÷No. of shares
EPS = 660000÷130000 = $5.08
P/E ratio for 2015
= $21.79÷$5.08
= 4.29 times