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Question - Computing the Price-Earnings Ratio - The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows:
Santiago Systems Income Statement For the Year Ended December 31, 20X2
Amount
Percent
Net sales
$5,345,000
100.0%
Less: Cost of goods sold
(3,474,250)
65.0
Gross margin
$1,870,750
35.0
Less: Operating expenses
(1,140,300)
21.3
Operating income
$730,450
13.7
Less: Interest expense
(27,000)
0.5
Income before taxes
$703,450
13.2
Less: Income taxes (40%)*
(281,380)
5.3
Net income
$422,070
7.9
* Includes both state and federal taxes.
Santiago Systems Statement of Retained Earnings For the Year Ended December 31, 20X2
Balance, beginning of period
$1,205,500
422,070
Total
$1,627,570
Preferred dividends
(40,000)
Dividends to common stockholders
(150,000)
Balance, end of period
$1,437,570
Santiago Systems Comparative Balance Sheets At December 31, 20X1 and 20X2
20X1
20X2
Assets
Current assets:
Cash
$1,900,000
$2,100,000
Marketable securities
350,000
400,000
Accounts receivable (net)
625,000
675,000
Inventories
230,000
240,000
Other
50,000
Total current assets
$3,155,000
$3,465,000
Property and equipment:
Land
$900,000
Building and equipment (net)
1,240,800
1,192,800
Total long-term assets
$2,140,800
$2,092,800
Total assets
$5,295,800
$5,557,800
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, short term
$247,300
$256,230
Accounts payable
250,000
Current maturity of long-term debt
3,000
4,000
Accrued payables
150,000
160,000
Total current liabilities
$640,300
$670,230
Long-term liabilities:
Bonds payable, 9%
300,000
Total liabilities
$940,300
$970,230
Stockholders' equity:
Preferred stock, $25 par, 8%
$500,000
Common stock, $1.00 par
Additional paid-in capital*
2,500,000
Retained earnings
1,205,500
1,437,570
Total stockholders' equity
$4,355,500
$4,587,570
Total liabilities and stockholders' equity
* For common stock only.
Also, assume that the price per common share for Santiago is $20.
Required - Compute the price-earnings ratio. Round earnings per share to two decimal places and use the rounded number to calculate the price-earnings ratio. Round the answer to two decimal places.
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