Question

Two online magazine companies reported the following in their financial statements: Net income Total stockholders' equity Earnings per share Stock price when annual results reported BusinessWorld 2015 2014 $ 111,500 $108,904 602,186 527,814 3.50 3.49 55.15 51.79 Fun and Games 2015 2014 $ 92,920 $172,473 462,151 482,049 2.40 4.28 33.30 60.45 Required: 1-a. Compute the 2015 ROE for each company. (Round your answers to 1 decimal place.) ROE BusinessWorld Fun and Games 1-b. Which company appears to generate greater returns on stockholders' equity in 2015? BusinessWorld Fun and Games Both Companies appear to generate the same return on equity 2-a. Compute the 2015 P/E ratio for each company. (Round your answers to 1 decimal place.) P/E Ratio times Business World Fun and Games times 2-b. Which company do investors appear to value more? BusinessWorld Fun and Games Both Companies appear to generate the same return on equity

Answer 1

1-a. 2015 Business world Fun and Games $111,500 $602,186 $92,920 $462,151 Net income (A) Shareholders' equity Return on equity (B) (A B) 18.5% 20.1% 1-b Fun games generate greater returns on stockholders' equity i.e. 20.11% 2-a Business world Fun and Games Stock price Earning per share P/E ratio $33.30 $2.40 $55.15 (A) $3.50 (B) (A+B) 15.8 13.9 2-b Fun and games will appear to value more among investor Since with lower investment invester would get higher return in Fun and Games share rather than Business world.