24skspltdivtreas
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24 In depth:Stock splits,stock dividends andTreasury stock
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Learning Objectives
1. Explain stock splits
2. Account for stock dividends
3. Account for Treasury stock transactions
4. Analysis: Compute and explain basicearnings per share and price earningsratio
Corporate financemanagers want to
maximize theavailability and
minimize the cost ofequity capital
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Objective 24.1: Explain stock splits
O24.1
1 Old Share1 New
Share
1 New
Share
The corporation calls in all
outstanding old shares and issues
new ones.
Stock splits are the process of replacing eachsingle share of outstanding stock with multiple new
shares of stock. For example a 2 for 1 stock splitwould result in every single share of old stock
being replaced with 2 shares of new stock.
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Why Stock splits?
When stock is split, the market must re-price the new
shares.Management hopes that in the re-pricing process, the
market will increase the total market value for the stock.
Example: With a 2 for 1 split, the hope is that the new price
will be greater than half of the previous price
This would benefit existing stockholders, their holdings
would be worth more.
It also helps the corporation. Investors are paying more forthe same projected returns than they were prior to the stock
split.
O24.1
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Stock splits: No journal entry notation only
EQUITY
Co mmo n St ock at Par 200,000
(20,000 shares @$10 par value)
Contributed Capital
in Excess o f Par 130,000
Retained Earnings 245,000
To tal Equity 575,000
Before Stock Split
EQUITY
Co mmo n St ock at Par 200,000
(40,000 shares @$5 par value)
Contributed Capital
in Excess o f Par 130,000
Retained Earnings 245,000
To tal Equity 575,000
After Stock Split
NO CHANGE IN THEDOLLAR AMOUNTS
IN ANY OF THEEQUITY ACCOUNTS
Profit
Debit Credit orLoss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O24.1
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Objective 24.2: Account for stock
dividends
Cash Dividends
$
More shares ofstock
Stock Dividends
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Stock dividendsresult in no change
in total equity
O24.1
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Stock dividends
O24.2
STOCKHOLDER EQUITY
Common Stock at Par 500,000
(100,000 shares @$5 par value)
Contributed Capital
in Excess of Par 250,000
Retained Earnings 1,000,000
Total Equity 1,750,000
Autofil Corporation
Stockdividends
move dollars
from here
To here
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Stock dividends
O24.2
STOCKHOLDER EQUITY
Common Stock at Par 500,000
(100,000 shares @$5 par value)
Contributed Capital
in Excess of Par 250,000
Retained Earnings 1,000,000
Total Equity 1,750,000
Autofil Corporation
No change intotal Equity
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Declaration of stock dividend
Board of Directors
We declare a10% stockdividend
I have 5,000sharesIll
get 500 more!
Stockholder
O24.2
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
No changein total
Equity
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Stockholders receive more shares
I get 500more shares
but. . .
Stockholder
O24.2
I still own the
same % ofthecorporation
500 moreshares of
stock
BeforedividendShares outstanding = 100,000.
Penny owned 5,000 or5,000/100,000 = 5%.
After dividendShares outstanding 100,000 x
1.1 = 110,000. Penny owns5,000 x 1.1 = 5,500 shares or
5,500/110,000 = 5%
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This size (%) of the stock dividend is important!
O24.2
Small Stock DividendDebitretained earnings for fair ormarket value of the stock (#shares individend times the market value of
each share) on the date of the
dividend declaration
CreditCommon Stock DividendDistributable for the par value times
the number of new shares issued inthe dividend
Credit Contributed Capital in Excessof Par an amount necessary to
balance the journal entry
Large Stock Dividend
Debitretained earnings for the parvalue per share times the number of
new shares issued in the dividend on
the date of the dividend declaration
CreditCommon Stock DividendDistributable for the par value per
share times the number of new shares
issued in the dividend
*20 -25% or less *20 -25% or more
* Assume 20%
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Stock dividends
O24.2
STOCKHOLDER EQUITY
Common Stock at Par 500,000
(100,000 shares @$5 par value)
Contributed Capital
in Excess of Par 250,000
Retained Earnings 1,000,000
Total Equity 1,750,000
Autofil CorporationBoth large andsmall stock
dividendsmove amountsfrom Retained
Earnings toContributed
Capitalaccounts
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This size (%) of the stock dividend is important!
O24.2
Small stockdividend movesthe market value
out of retainedearnings
Large stockdividend movespar value out of
retained earnings
*20 -25% or less *20 -25% or more
* Assume 20%
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Recording small stock dividend- date of declaration
Billiards Corporation declares a 15% stock dividend.
There are 300,000 shares outstanding $5 par value.The market price per share is $12 on the same date.
Page 56
Date Description PR Debit Credit12/31/11 Retained Earnings 3500 540,000
Stock Dividends Distributable 3110 225,000
Contributed Capital in Excess 315,000
of Par, Common Stock 3115
GENERAL JOURNAL
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O24.2
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Recording small stock dividend- date of declaration
Billiards Corporation declares a 15% stock dividend.
There are 300,000 shares outstanding $5 par value.The market price per share is $12 on the same date.
Page 56
Date Description PR Debit Credit12/31/11 Retained Earnings 3500 540,000
Stock Dividends Distributable 3110 225,000
Contributed Capital in Excess 315,000
of Par, Common Stock 3115
GENERAL JOURNAL
O24.2
300,000 x .15 x $12 market price
300,000 x .15 x $5 par value
540,000225,000
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Recording small stock dividend- date of declaration
Billiards Corporation declares a 15% stock dividend.
There are 300,000 shares outstanding $5 par value.The market price per share is $12 on the same date.
Page 56
Date Description PR Debit Credit12/31/11 Retained Earnings 3500 540,000
Stock Dividends Distributable 3110 225,000
Contributed Capital in Excess 315,000
of Par, Common Stock 3115
GENERAL JOURNAL
O24.2
This is a temporary holding account in the Equitysection. When the stock shares are actually
distributed, this amount will be moved to CommonStock at Par as shown on the following slides
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Recording small stock dividend- date of record
Billiards Corporation declares a 15% stock dividend.
There are 300,000 shares outstanding $5 par value.The market price per share is $12 on the same date.
Date of record 2/15/12; date of distribution 3/1/12
Page 56Date Description PR Debit Credit
2/15/12
GENERAL JOURNAL
O24.2
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Recording small stock dividend- date of distribution
Page 56Date Description PR Debit Credit
3/1/12 Stock Dividends Distributable 3110 225,000
Common Stock, $5 par 3005 225,000
GENERAL JOURNAL
O24.2
On the date of distribution the parvalue of the stock dividend is formallymoved to the Common Stock account.
Billiards Corporation declares a 15% stock dividend.
There are 300,000 shares outstanding $5 par value.The market price per share is $12 on the same date.
Date of record 2/15/12; date of distribution 3/1/12
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
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Recording large stock dividend- date of declaration
Bowling Corporation declares a 30% stock dividend.
There are 500,000 shares outstanding $10 par value.The market price per share is $23 on the same date.
Page 56
Date Description PR Debit Credit12/31/11 Retained Earnings 3500 1,500,000
Stock Dividends Distributable 3110 1,500,000
GENERAL JOURNAL
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O24.2
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Recording large stock dividend- date of declaration
Bowling Corporation declares a 30% stock dividend.
There are 500,000 shares outstanding $10 par value.The market price per share is $23 on the same date.
Page 56
Date Description PR Debit Credit12/31/11 Retained Earnings 3500 1,500,000
Stock Dividends Distributable 3110 1,500,000
GENERAL JOURNAL
O24.2
500,000 x .3 x $10 par value
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Recording large stock dividend- date of record
Page 56
Date Description PR Debit Credit
2/15/12
GENERAL JOURNAL
O24.2
Bowling Corporation declares a 30% stock dividend.
There are 500,000 shares outstanding $10 par value.The market price per share is $23 on the same date.
Date of record 2/15/12; date of distribution 3/1/12
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Recording large stock dividend- date of distribution
O24.2
Bowling Corporation declares a 30% stock dividend.
There are 500,000 shares outstanding $10 par value.The market price per share is $23 on the same date.
Date of record 2/15/12; date of distribution 3/1/12
Page 56
Date Description PR Debit Credit
3/1/12 Stock Dividends Distributable 3110 1,500,000
Common Stock, $10 par 3005 1,500,000
GENERAL JOURNAL
On the date of distribution the parvalue of the stock dividend is formallymoved to the Common Stock account.
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
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Why stock dividends?
O24.2
For the same reasons stock splits are used:When stock dividends are distributed, the market
must re-price the new shares.
Management hopes that in the re-pricing process,the market will increase the total market value for
the stock.
The following slide demonstrates three scenarios. ..
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New market price immediately after stock
dividend
O24.2
Shares
Outstanding
Market Price
per share
Total
Market
value
BEFORE STOCK DIVIDEND 400,000 16.00 6,400,000$
Stock div idend 10%
AFTER STOCK DIVIDEND 440,000
14.55$
No Change in value 440,000 14.55$ 6,400,000$
Stockholders gain 440,000 16.00$ 7,040,000$
Stockholders lose 440,000 14.00$ 6,160,000$
Examples of result ing market price per share
If new market price is greater than
then stockholders gain value, if less, they lose value.
1
2
3
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New market price immediately after stock
dividend
O24.2
Shares
Outstanding
Market Price
per share
Total
Market
value
BEFORE STOCK DIVIDEND 400,000 16.00 6,400,000$
Stock div idend 10%
AFTER STOCK DIVIDEND 440,000
14.55$
No Change in value 440,000 14.55$ 6,400,000$
Stockholders gain 440,000 16.00$ 7,040,000$
Stockholders lose 440,000 14.00$ 6,160,000$
Examples of result ing market price per share
If new market price is greater than
then stockholders gain value, if less, they lose value.
Management hopes for this to resultthen new stockholders will pay the
issuing firm more for each new share
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Objective 24.3: Account for Treasurystock transactions
O24.3
Treasury stock is a
CONTRAEQUITY
Account
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
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Treasury stock
O24.3
Cash Account s Payab le SalesAccount s Receiv ab le Long Term Deb t
Inventory
Property, Plant & Equipment
Investments
Cost of Goo ds Sold
Sellling Exp enses
Equit y General & Admin. Expenses
Com mo n Stoc k at Par
Cont ribut ed Capitalin Excess of Par
Retained Earnings
Treasury Stock
Profit
Debit Credit or
Loss
Expenses
BALANCE SH EET INCOM E STATEM ENTAsset s Liabilit ies Revenue
Net Stockholder Equity 260,000
Contributed Capital andRetained Earnings 300,000
(40,000)Treasury Stock
TreasuryStock
REDUCESStockholdersEquity
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Treasury stock
Authorized Shares
Issued Shares
Outstanding
Shares
Treasury stock
purchases resultin fewer
outstandingshares than
issued shares
O24.3
(40,000)Treasury Stock
Contributed Capital andRetained Earnings
300,000
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Treasury stock purchase
Marine Corporation repurchases 2,000 sharesof their common stock for $58 per share.
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Page 17
Date Description PR Debit Credit
5/17/12 Treasury Stock 3800 116,000
Cash 1000 116,000
Purchase 2 ,000 shares treasury sto ck
GENERAL JOURNAL
O24.3
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Resulting change to equity
STOCKHOLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par )
Cont ributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Retained Earnings 3,200,000
To tal Equity 16,700,000
Marine Corporation
BEFORE Treasury Stock Purchase
STOCKHOLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par 5 ,00 0 in treasury)
Contributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Retained Earnings 3,200,000
Treasury Stock (116,000)
To tal Equity 16,584,000
Marine Corporation
AFTER Treasury Stock Purchase
The Treasury Stock purchasereduces Cash and REDUCES
TOTAL STOCKHOLDER EQUITYO24.3
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Treasury stock sale
Marine Corporation sells 1,000 shares
of their Treasury stock for $58 per share(same as purchase price)
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Page 19
Date Description PR Debit Credit
6/30/12 Cash 1000 58,000
Treasury Stock 3800 58,000
Sale o f 1,000 shares treasury stock @ $58
GENERAL JOURNAL
O24.3
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Resulting change to equity
STOCKHOLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par )
Cont ributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Retained Earnings 3,200,000
Treasury Stock (116,000)
To tal Equity 16,584,000
Marine Corporation
BEFORE Treasury Stock Sale
STOCKHOLDER EQUI TY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par 5,00 0 in t reasury)
Contributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Retained Earnings 3,200,000
Treasury Stock (58,000)
To tal Equity 16,642,000
Marine Corporation
AFTER Treasury Stock Sale
The Treasury Stock sale increasesCash and INCREASES TOTAL
STOCKHOLDER EQUITYO24.3
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Treasury stock sale
Marine Corporation sells 500 shares
of their Treasury stock for $74 per share(purchase price was $58)
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Page 19
Date Description PR Debit Credit
8/30/12 Cash 1000 37,000
Contributed Capital, Treasury Stock 3700 8,000
Treasury Stock 3800 29,000
Sale of 50 0 shares tre asury stock @ $ 74
GENERAL JOURNAL
O24.3
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Treasury stock sale
Marine Corporation sells 500 shares
of their Treasury stock for $74 per share(purchase price was $58)
Page 19
Date Description PR Debit Credit
8/30/12 Cash 1000 37,000
Contributed Capital, Treasury Stock 3700 8,000
Treasury Stock 3800 29,000
Sale of 50 0 shares tre asury stock @ $ 74
GENERAL JOURNAL
O24.3
This is a normal creditbalance Equityaccount. Itrepresents the excess over cost received for the
resale of Treasury stock held by the firm.
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Page 19
Date Description PR Debit Credit
8/30/12 Cash 1000 37,000
Contributed Capital, Treasury Stock 3700 8,000
Treasury Stock 3800 29,000
Sale of 50 0 shares tre asury stock @ $ 74
GENERAL JOURNAL
Treasury stock sale
O24.3
$74 x 500 shares
Amount needed tobalance
500 shares x $58cost
Marine Corporation sells 500 shares
of their Treasury stock for $74 per share(purchase price was $58)
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Resulting change to equity
STOCKHOLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par )
Cont ributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Retained Earnings 3,200,000
Treasury Stock (58,000)
To tal Equity 16,642,000
Marine Corporation
BEFORE Treasury Stock Sale
STOCKHOLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par 5,00 0 in t reasury)
Cont ributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Contributed CapitalTreasury Stock 8,000
Retained Earnings 3,200,000
Treasury Stock (29,000)Total Equity 16,679,000
Marine Corporation
AFTER Treasury Stock Sale
The sale of Treasury Stock abovecost requires the use of a
Contributed Capital, Treasury stockaccount
O24.3
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Treasury stock sale
Marine Corporation sells remaining 500 shares
of their Treasury stock for $32 per share(purchase price was $58)
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Page 19
Date Description PR Debit Credit
11/30/12 Cash 1000 16,000
Contributed Capital, Treasury Stock 3700 8,000
Retained Earnings 3900 5,000
Treasury Stock 3800 29,000
GENERAL JOURNAL
O24.3
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Treasury stock sale
Marine Corporation sells remaining 500 shares
of their Treasury stock for $32 per share(purchase price was $58)
Page 19
Date Description PR Debit Credit
11/30/12 Cash 1000 16,000
Contributed Capital, Treasury Stock 3700 8,000
Retained Earnings 3900 5,000
Treasury Stock 3800 29,000
GENERAL JOURNAL
O24.3
All available creditbalances in the ContributedCapital, Treasury Stock account are used (debited)first. If additional debits are necessary to balancethe journal entry, the Retained Earnings account is
used.
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Treasury stock sale
Marine Corporation sells remaining 500 shares
of their Treasury stock for $32 per share(purchase price was $58)
Page 19
Date Description PR Debit Credit
11/30/12 Cash 1000 16,000
Contributed Capital, Treasury Stock 3700 8,000
Retained Earnings 3900 5,000
Treasury Stock 3800 29,000
GENERAL JOURNAL
O24.3
$32 x 500 shares
Available credit balance of 8,000Amount needed to
balance
500 shares x $58cost
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STOCKH OLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par 5,00 0 in t reasury)
Contr ibuted Capital in Excesso f Par, Common Stock 11,250,000
Contr ibuted CapitalTreasury Stock 0
Retained Earnings 3,195,000
Treasury Stock 0To tal Equity 16,695,000
Resulting change to equity
Marine Corporation
BEFORE Treasury Stock Sale
STOCKHOLDER EQUITY
Common Stock at Par 2,250,000
(25 0,00 0 shares @ $5 par 5,00 0 in t reasury)
Cont ributed Capital in Excess
o f Par, Co mmo n Sto ck 11,250,000
Contributed CapitalTreasury Stock 8,000
Retained Earnings 3,200,000
Treasury Stock (29,000)To tal Equity 16,679,000
Marine Corporation
AFTER Treasury Stock Sale
The Treasury Stock and theContributed Capital, Treasury stock
accounts are zero. Retained Earningsis reduced by $5,000
O24.3
and total
Equity went upby $16,000!
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Objective 24.4:Analysis: Compute andexplain basic earnings per share and price
earnings ratio
Profit
Debit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
P/E ratiocompares
earnings foreach share to
the marketprice for each
share
O24.4
Investors are especially interested inthese earnings ratios which allow market
comparisons of stock investments
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Basic earnings per share
Earnings available to common stockholders =
net income minus preferred dividends
This calculation can only becompared to the prior periodsin the same firm. The followingP/E ratio allows comparison to
other firms stock.
O24.4
Average # common sharesoutstanding
Earnings available tocommon stockholders
=Basic
Earningsper
share
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Example
O24.4
Asset s 2011 Liabili t ies 2011
Cash 112,400 Total liab ilit ies 925,600
Accounts receivable 437,600 Equit y
Inventory 866,900 Common Stock -No par 1,900,000
Propert y, Plant , Equip. 2,836,700 Preferred Stock -No par 80,000
Retained Earnings 1,348,000
Total assets 4,253,600 Total liab. + equit y 4,253,600
Preferred d ividend 6,400$
Market price common 15$ per share
Sales 3 ,457,600 Earnings availab le to
co mmo n st o ckho ld ers 4 28 ,8 30$
Cost of Goods Sold 2,247,440 Avg. Common Shares Outstanding 200,000
Wages expense 345,300 Basic Earnings per Share 2.14$
Sellling expenses 123,500 (Earnings avail t o common/ shares out st anding)Administ rat ive exp. 196,500 Price Earnings rat io 7.0 x
Miscellaneous exp. 109,630 (Market price/ EPS)
Net Profit 435,230
Balance Sheet -Allway Corporat ion
As of 12/ 31 2011
Income Statement
For the year ended 12/ 31/ 11
Investors are paying 7times the annual earnings
per share for 1 share ofAllway common stock
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End Unit 15