"25. In problem 24, if the firm sells at two times book value per share, what will the P/E ratio be?2-25. Solution:Bradley Gypsum Company (continued)2 × book value = price2 × $15.00 = $30Price = P/E ratioEarnings per share $30.00 = 21.43 P/E ratio $1.40 S2-31 26. For December 31, 2007, the balance sheet of the Gardner Corporation is as follows: ________________________________________________________________________ Current AssetsLiabilitiesCash.............................................$ 15,000 Accounts payable ................ $ 20,000Accounts receivable ....................22,500 Notes payable ...................... 30,000Inventory .....................................37,500 Bonds payable ..................... 75,000Prepaid expenses .........................18,000 Fixed Assets Stockholders’ EquityPlant and equipment (gross) ? ....$375,000 Common stock .................... $112,500Less: Accumulated ...................... Paid-in capital ..................... 37,500depreciation ..............................75,000 Retained earnings ................ 118,000Net plant and assets .....................300,000 Total liabilities andTotal assets ..................................$393,000 stockholders’ equity ......... $393,000 ________________________________________________________________________ Sales for the year 2008 were $330,000, with cost of goods sold being 60 percent of sales.Selling and administrative expense was $33,000. Depreciation expense was 10 percent ofplant and equipment (gross) at the beginning of the year. Interest expense for the notespayable was 10 percent, while interest on the bonds payable was 12 percent. These werebased on December 31, 2007, balances. The tax rate averaged 20 percent.Two thousand dollars in preferred stock dividends were paid and $4,100 in dividends werepaid to common stockholders. There were 10,000 shares of common stock outstanding.During the year 2008, the cash balance and prepaid expenses balance were unchanged.Accounts receivable and inventory increased by 20 percent. A new machine was purchasedon December 31, 2008, at a cost of $60,000.Accounts payable increased by 30 percent. At year-end, December 31, 2008, notespayable increased by $10,000 and bonds payable decreased by $15,000. The common stockand paid-in capital in excess of par accounts did not change. a. Prepare an income statement for the year 2008. b. Prepare a statement of retained earnings for the year 2008. c. Prepare a balance sheet as of December 31, 2008.S2-32 2-26. Solution:Gardner Corporation2008 Income Statementa. Sales ................................................................. $330,000 Cost of good sold (60% of $330,000) .............. 198,000 Gross profit .................................................. 132,000 Selling and administrative expense .................. 33,000 Depreciation expense (8% × $375,000) ........... 37,500Operating profit (EBIT) ............................... 61,5001Interest expense ................................................ 12,000Earnings before taxes .................................. 49,500 Taxes (20%) ..................................................... 9,900 Earnings after taxes (EAT) ..........................39,600 Preferred stock dividends ................................. 2,000 Earnings available to common stockholder .....$ 37,600 Shares outstanding ........................................... 10,000 Earnings per share ............................................$ 3.76b. 2004 Statement of Retained Earnings Retained earnings balance, January 1, 2008 ....$118,000 Add: Earnings available to commonstockholders, 2008..............................................37,600 Deduct: Cash dividend declared in 2004 .....(4,100) Retained earnings balance,December 31, 2008 ......................................$151,5001(10% × $30,000) + (12% × $75,000) = $12,000S2-33 2-26. (Continued)c. 2008 Balance SheetCurrent Assets Liabilities Cash $15,000 Accounts $26,000payableAccounts 27,000 Notes payable 40,000receivable Inventory 45,000 Bonds payable 60,000Prepaid 18,000_______expenses$105,000$126,000Fixed Assets Stockholders’ Equity Gross plant $435,000 Common stock $112,500 AccumulatedPaid in capital in 2 depreciation (112,500) excess of par 37,500 Net plant 322,500 Retained151,500 earnings Total assets $427,500 Total Liability & $427,500Equity 2 Accumulated depreciation is equal to $75,000 + 10% ($375,000) = $75,000 + $37,500 = $112,500.S2-34 27. Prepare a statement of cash flows for the Crosby Corporation. Follow the generalprocedures indicated in Table 2 ?10. _______________________________________________________________________CROSBY CORPORATIONIncome StatementFor the Year Ended December 31, 2008Sales .......................................................................................... $2,200,000Cost of goods sold ..................................................................... 1,300,000Gross profits ........................................................................ 900,000Selling and administrative expense ........................................... 420,000Depreciation expense ................................................................150,000Operating income ................................................................ 330,000Interest expense .........................................................................90,000Earnings before taxes .......................................................... 240,000Taxes ......................................................................................... 80,000Earnings after taxes ............................................................. 160,000Preferred stock dividends ............................................................ 10,000Earnings available to common stockholders............................. $150,000Shares outstanding .................................................................... 120,000Earnings per share ..................................................................... $1.25Statement of Retained EarningsFor the Year Ended December 31, 2008Retained earnings, balance, January 1, 2008 ............................ $500,000Add: Earnings available to common stockholders, 2008....... 150,000Deduct: Cash dividends declared and paid in 2008 ............... 50,000Retained earnings, balance, December 31, 2008 ...................... $600,000Comparative Balance SheetsFor 2007 and 2008Year-End Year-End Assets 2007 2008Current assets:Cash..................................................................................... $ 70,000 $100,000Accounts receivable (net) ................................................... 300,000 350,000Inventory ................................................................................... 410,000 430,000Prepaid expenses ....................................................................... 50,00030,000Total current assets ............................................................. 830,000 910,000Investments (long-term securities) ............................................ 80,000 70,000Plant and equipment .................................................................. 2,000,000 2,400,000Less: Accumulated depreciation ......................................... 1,000,000 1,150,000Net plant and equipment ........................................................... 1,000,000 1,250,000Total assets ................................................................................ $1,910,000 $2,230,000S2-35 "