© 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO6 Calculate earnings per share. LO7 Calculate.

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© 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO6 Calculate earnings per share. LO7 Calculate and interpret market ratios. LO8 Calculate and interpret liquidity ratios.

© 2014 Cengage Learning. All Rights Reserved. Net Income after Federal Income Tax$79, Number of Shares Outstanding÷ 7,500÷ 75,000 Earnings per Share$10.65$1.07 Earnings per Share ●Net income after federal income tax divided by the number of outstanding shares of stock is called earnings per share. ●Earnings per share is often abbreviated as EPS. SLIDE 2 LO6 Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Market Ratios ●A ratio that measures a corporation’s financial performance in relation to the market value of its stock is called a market ratio. SLIDE 3 LO7 Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Dividend Yield ●The relationship between dividends per share and market price per share is called the dividend yield. SLIDE 4 LO7 Lesson 17-4 Dividends per Share ÷ Market Price per Share = Dividend Yield $2.00÷$228.75=0.87%

© 2014 Cengage Learning. All Rights Reserved. Price-Earnings Ratio ●The relationship between the market value per share and earnings per share of a stock is called the price-earnings ratio. ●It is often referred to as the P/E ratio. SLIDE 5 LO7 Lesson 17-4 Market Price per Share ÷ Earnings per Share = Price-Earnings Ratio $228.75÷$10.65=21.5

© 2014 Cengage Learning. All Rights Reserved. Liquidity Ratios ●A ratio that measures the ability of a business to pay its current financial obligations is called a liquidity ratio. SLIDE 6 LO8 Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Working Capital ●The amount of current assets less current liabilities is called working capital. SLIDE 7 LO8 Lesson 17-4 Current Assets − Current Liabilities = Working Capital $185,322.90−$32,251.78=$153,071.12

© 2014 Cengage Learning. All Rights Reserved. Current Ratio ●A ratio that measures the relationship of current assets to current liabilities is called the current ratio. ●The current ratio measures a company’s ability to pay its current liabilities when due. SLIDE 8 Current Assets÷Current Liabilities=Current Ratio $185,322.90÷$32,251.78=5.75 Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Quick Ratio ●Cash and other current assets that can be quickly converted into cash are called quick assets. ●Quick assets are also referred to as liquid assets. ●A ratio that measures the relationship of quick assets to current liabilities is called the quick ratio. SLIDE 9 Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Quick Ratio SLIDE 10 Cash+Accounts Receivable=Quick Assets ÷Current Liabilities=Quick Ratio $72,316.90÷$32,251.78=2.24 $54, $17,872.56=$72, Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 1.Why can one corporation’s earnings per share not be compared to the EPS of other corporations? SLIDE 11 ANSWER Each corporation’s EPS is a unique number because corporations can issue any number of shares. As a result, the earnings of each corporation are divided by a different number of shares. Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 2.What group is the primary user of market ratios? SLIDE 12 ANSWER Investors Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 3.Do income stocks typically have low or high dividend yields? SLIDE 13 ANSWER High Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 4.Do growth stocks typically have low or high price-earnings ratios? SLIDE 14 ANSWER High Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 5.What is the primary source of data to calculate liquidity ratios? SLIDE 15 ANSWER Balance sheet Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 6.What does working capital measure? SLIDE 16 ANSWER Working capital is a measure of the financial resources available for the daily operations of the business. Lesson 17-4

© 2014 Cengage Learning. All Rights Reserved. Lesson 17-4 Audit Your Understanding 7.Why is the current ratio a useful measure of financial strength? SLIDE 17 ANSWER The current ratio permits a business to compare itself to its industry or to provide a convenient relative measurement from year to year regarding the company’s ability to pay current liabilities when due. Lesson 17-4