Question

As a stockholder in Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $15 million, liabilities of $12 million, after-tax earnings of $2 million, and 843,000 outstanding shares of common stock

(a) Calculate the earnings per share of Bozo Oil's common stock. (Round your answer to 2 decimal places.) Earnings per share
(b) Assume a share of Bozo Oil's common stock has a market value of $40, what is the firm's price-earnings ratio? (Round your intermediate calculation to 2 decimal places and final answer to the nearest whole number.) Price-earnings ratio
(c) Calculate the book value of a share of Bozo Oil's common stock. (Round your answer to 2 decimal places.) Book value per share

Answer 1

The earnings per share (EPS) for Bozo Oil's common stock is approximately $2.37; the price-earnings ratio (P/E ratio) is around 17, and the book value per share is about $3.56.

Step-by-step explanation:

The earnings per share (EPS) is calculated by taking the after-tax earnings and dividing them by the number of outstanding shares. In this case, Bozo Oil Company has after-tax earnings of $2 million, and there are 843,000 outstanding shares. Therefore, the EPS is $2,375,444.96 ($2,000,000 / 843,000), or rounded to two decimal places, approximately $2.37.

To find the price-earnings ratio (P/E ratio), we divide the market value of a share by the earnings per share. If the market value of Bozo Oil's stock is $40, the P/E ratio is $40/$2.37 which is approximately 16.88, rounded to the nearest whole number, 17.

Finally, the book value per share is computed by subtracting liabilities from assets to get the shareholders' equity, then dividing it by the number of outstanding shares. Bozo Oil Company has assets of $15 million and liabilities of $12 million, yielding a shareholders' equity of $3 million. Dividing this number by the number of shares (843,000) gives us a book value per share of about $3.56, rounded to two decimal places.