Question

Buy Now and Gerald's EZ Furniture are two publicly traded rental companies. They reported the following in their financial statements (in millions of dollars, except per-share amounts and stock prices):

	2016			2015				2016			2015
Net income	$	128		$	180			$	135		$	189
Total stockholders' equity		1,127			1,150				1,333			1,235
Earnings per share		1.66			2.35				2.41			3.15
Stock price when annual results reported		31.82			30.37				34.72			36.13

Required:

1. 1-a. Compute the 2016 ROE for each company. Express ROE as a percentage. TIP: Remember that the bottom of the ROE ratio uses the average stockholders’ equity.

2. 1-b. Which company appears to generate greater returns on stockholders’ equity in 2016?

3. 2-a. Compute the 2016 P/E ratio for each company.

4. 2-b. Which company do investors appear to value more?

Answer 1

1(a) )	(in millions of dollars)		(in millions of dollars)
	Buy Now		Gerald EZ Furniture
	2016		2016
Net income (A)	$      128.00		$     135.00
Average Shareholders Equity (B)	$   1,138.50		$  1,284.00
Return on Equity  = (A)/(B)	11.24%		10.51%
1(b)  BuyNow is geneating greater ROE in 2016.
2(a)
Market price per Share (A)	$        31.82		$       34.72
EPS(B)	$          1.66		$         2.41
P/E = (A)/(B)	19.17		14.41
2(b) = Buy Now have more Value