2.3 Per Share Ratios

Question 1

Earnings per share (BEPS)

Answer 1

Net income available to common shareholders/
Weighted average shares outstanding common

That is:

Net income minus preferred Dividends/
Weighted Average shares outstanding

BEPS numerator is calculated for Both

1) income from continuing Operations
- Preferred Dividends
2) Income after Discontinued Operations
- Preferred Dividends

Question 2

Diluted earnings per share

DEPS

Answer 2

We add back the effects of PCS
Potential common stock

So debt that can be converted is added back net of tax. Preferred stock that can be converted equals at back the preferred Dividends

Then re-calculate the common shares as if this convertible that or preferred stock had been converted

Question 3

Price to EBITDA

Answer 3

Market price per share/
EBITDA Per Share

Attempts to Use as a proxy for cash flow (excludes non-cash depreciation and amortization)

Bad because,

1. Over states Income
2. Neglects net working capital (inventories receivables and payables)
3. Not good for valuation because companies that have more debt should be valued less

Question 4

Book value per share

Answer 4

Total stockholders equity-preferred Equity/
Number of common shares outstanding

Limitation is that this is only the value of equity on the books, not market value

Does not consider future earnings like market value

Does not consider that some of the assets of the company may be pledged

Question 5

Price to earnings ratio

Answer 5

Market price per share/
Earnings per share

A decrease in the investors required rate return will cause to share prices to go up. The numerator will go up equaling a higher PE ratio

Decline in the rate of dividend growth will cause the share place to decline, lower PE ratio. Lower numerator

Increasing dividends Yield
(
Dividends per share/
Market price per share) Indicates the share price is declining. Lower numerator lower PE

Question 6

Market to book ratio

Answer 6

Market price per share/
Book value per share

Well manage firms sell at a high multiple of Book value per share

Question 7

Price-Sales ratio

Answer 7

Market price per share/
Sales Per share

Analyst like that it is less subject to manipulation and strong sales indicate profits

Question 8

Earnings yield

Answer 8

Earnings per share/
Market price per share

Can be compared by investors to other types of investments. Measures amount of earnings an investor expect to receive per dollar invested

Question 9

Dividend payout ratio

Answer 9

Dividends to Common Shareholders/
Income available to common shareholders

Go to companies tend to have low pay out preferring to reinvest

Question 10

Dividends yield

Answer 10

Dividends per share/
Market price per share

Since dividend tax rate is lower than capital gains, many investors prefer a higher dividend yield

Question 11

Shareholder return

Answer 11

Ending stock price-beginning stock price-Annual dividends per share/
Beginning stock price

Measures to return on a purchase of stock

Question 12

BEPS Numerator

Answer 12

BEPS is calculated with and without Discontinued Operations. Both are calculated and separately shown.

Preferred Dividends
A) Non-Cumulative Paid are subtracted
B) Cumulative PAID or unpaid for the Current year are subtracted (arrears are ignored)

Income from continuing ops
- preferred Dividends
——————————————-
BEPS numerator 1

Income after discontinued Ops
- Preferred Dividends
—————————————-
BEPS numerator 2

Question 13

EPS

Simple Capital Structure

Answer 13

• No Preferred Stock
  And
• No Dilutive “Potential” Common Stock
  (A security that entitles owner to obtain Common Stock ie convertible securities, options, warrants)