Answers: Chapter 7 -  What the Income Statement Reveals


7.1: If the earnings after taxes of a company owned by 100 shareholders (each of whom own 1 share of the company)  is $200,000, what is the earnings per share (EPS) of the company?

The EPS is calculated by dividing the earnings after taxes by the number of shares issued by the company. 

$200,000 / 100 shares = $200

 

7.2: If the earnings after taxes of a company is $200,000 and its revenue is $1,000,000, what is its net profit margin?  

The net profit margin is the company's net earnings divided by it's total revenue, in percentage terms. 

$200,000 / $1,000,000 = 0.20, which is 20%.

 

7.3: What one of these items most accurately describe the meaning of retained earnings. 

  1. Retained earnings is the dividend of a company.
  2. Retained earnings is the earnings after taxes kept by the company instead of distributing it to its shareholders.
  3. Retained earnings is the net profit margin of a company.

The correct answer is #2
After a company determines how much money it has made during the year, it has to decide what to do with that money. It can do basically two things: pay it to its shareholders (dividends) or plow it back into the company to buy equipment or expand the business. The money that is not distributed as dividends is called retained earnings. You can think of retained earnings as additional equity that the owners of the company have contributed to the business.

 

7.4: If the dividend per share of a company is $2 and its share price is $40, what is its dividend yield?

The dividend yield is the dividend per share divided by the share price, and is typically represented as a percentage.

$2 / $40 = .05, which is 5%.

 

7.5: Choose one of the stocks in the list below that would not be considered a blue-chip stock. (Belongs in chapter 8 Q/A)

  1. General Electric (GE) stock
  2. Wal-Mart (WMT) stock
  3. Disney (DIS) stock
  4. LinkedIn (LNKD) stock

The correct answer is #4
The stocks of stable, well-established companies that have paid dividends to investors over a long time, and that are no longer growing at a fast pace, are known as blue-chip stocks.

LinkedIn is the only company on the list that is still growing at a fast pace. Furthermore, they are the only company on the list that has not paid dividends to it's shareholders over a long period of time; LinkedIn only became a publicly held company after their 2011 IPO.