Net Income per Common Share 2008 2007 2006

Basic earnings (loss) per share:

Continuing operations $1.08* .76 0.71

Discontinued operations 1.24** 0.061.51

Total $2.32 0.82 2.22

Diluted earnings (loss) per share:

Continuing operations $1.05‡ 0.74 0.70

Discontinued operations 1.21 ± 0.061.50

Total $2.26 0.80 2.20

* $106,039 / 98,424 = $1.08

** $122,115/ 98,424 = $1.24

‡ $106,039 / 100,644 = $1.05

± $122,115 / 100,644 = $1.21

Analysis Case 19-14

Requirement 1

In its simplest form, earnings per share is merely a firm’s net income divided by the number of shares outstanding throughout the year.

Earnings per share = Income available to common shareholders
Weighted-average shares outstanding

= $487
181

= $2.69

Requirement 2

Price-earnings ratio = Market price per share
Earnings per share

= $47.00
$2.69

= 17.5

The ratio is a measure of the market's perception of the “quality” of a company’s earnings. It indicates the price multiple the capital market is willing to pay for the company’s earnings. In a way, this ratio reflects the market’s perceptions of the company’s growth potential, stability, and relative risk in that the ratio relates these performance measures with the external judgment of the marketplace concerning the value of the firm.

The calculation indicates that AGF’s share price represents $17.50 for every dollar of earnings. In that regard, it measures the “quality” of earnings in the sense that it represents the market’s expectation of future earnings as indicated by current earnings. We should be aware, though, that a ratio might be low, not because earnings expectations are low, but because of abnormally elevated current earnings, or, the ratio might be high, not because earnings expectations are high, but because the company’s current earnings are temporarily depressed.

Case 19-14 (concluded)

Requirement 3

The dividend payout ratio expresses the percentage of earnings that is distributed to shareholders as dividends. To calculate the ratio for AGF with the information provided, we must estimate dividends from analysis of the retained earnings account:

Retained Earnings

2,428

487 Net income

Dividends ?

2,730

Dividends apparently were $185,000,000. Dividends per share, then, would be $185 / 181 = $1.02

Dividend payout ratio = Cash dividends per share
Earnings per share

= $1.02
$2.69

= 37.9%

AGF paid cash dividends of $1.02 cents per share during the most recent year, almost 38% of earnings. The ratio provides an indication of the firm’s reinvestment strategy. If the payout ratio is low, it suggests that the company retains a large portion of earnings for reinvestment for purposes such as new facilities and current operations. Sometimes, though, the ratio just reflects managerial strategy regarding the mix of internal versus external financing. Investors who, for tax or other reasons, prefer current income over market price appreciation, or vice versa, are particularly interested in this ratio.

Research Case 19-15

The results students report will vary somewhat depending on the dates and times quotes were accessed. It is unlikely, though, that their relative comparisons or conclusions will differ.

The PE ratio is the market price per share divided by the earning per share. It measures the market's perception of the “quality” of a company’s earnings by indicating the price multiple the capital market is willing to pay for the company’s earnings. The ratio reflects the information provided by all financial information in that the market price reflects analysts’ perceptions of the company’s growth potential, stability, and relative risk. The price-earnings ratio relates these performance measures with the external judgment of the marketplace concerning the value of the firm. The ratio measures the “quality” of earnings in the sense that it represents the market’s expectation of future earnings as indicated by current earnings. Caution is called for in comparing price-earnings ratios. Historically, the ratio for both companies has been relatively high, reflecting growth expectations. The recent economic downturn affected the ratio for both companies.

Analysis Case 19-16

Requirement 1

The price-earnings ratio is simply the market price per share divided by the earnings per share. For Kellogg, the ratio is:

$43.65 ч $2.99 = 14.6

It purports to measure the market's perception of the “quality” of a company’s earnings by indicating the price multiple the securities market is willing to pay for the company’s earnings. The P/E ratio reflects analysts’ perceptions of the company’s growth potential, stability, and relative risk by relating these performance measures with the external judgment of the marketplace in regard to the value of the company.

Care is needed when evaluating price-earnings ratios. Like other ratios, it is best evaluated in context of P/E ratios of earlier periods and other, similar companies. For example, the P/E ratio of General Mills, Kellogg’s prime competitor was 15.5 at the same time. Neither is particularly high or low relative to the average P/E ratio for all companies at the time, which was 15.2.

Requirement 2

The dividend payout ratio expresses the percentage of earnings that is distributed to shareholders as dividends. The ratio is calculated by dividing dividends per common share by the earnings per share. For Kellogg’s most recent 12 months, the ratio is:

($.34 x 4) ч ($2.99) = 45%

Relative to the average company, this payout percentage is quite high. It is the same as General Mills, Kellogg’s prime competitor. General Mills’ payout ratio also was 45% at the same time. Historically, both companies and the industry in general have relatively high dividend payouts. This ratio provides an indication of a firm’s reinvestment strategy. A low payout percentage suggests that a company is retaining a large portion of earnings for reinvestment in new projects. Low ratios often are found in growth industries. High payouts, like those of General Mills and Kellogg, often are found in mature industries. Sometimes, the ratio is just an indication of management strategy related to the mix of internal versus external financing. A high ratio is preferred by investors who, for tax or other reasons, prefer current income to market price appreciation.

Research Case 19-17

Requirement 1

The appropriate accounting treatment for the situation is specified in FASB ASC 718–10–35: “Compensation-Stock Compensation-Overall.” Section 718–10–35–15 states:

Date: 2016-01-14; view: 720