Ratios: Accounting Change
Polymer Element Corporation presented the following (partial) income statements (dollars in thousands, except EPS):
|
December 31 |
|||
|
2000 |
1999 |
1997 |
|
|
Income from continuing |
|||
|
operations after tax |
$ 207,500 |
$ 195,400 |
$ 189,600 |
|
Cumulative effect of change in |
|||
|
accounting principle |
(25,000) |
0 |
(45,000) |
|
Net income |
$ 182,500 |
$ 195,400 |
$ 144,600 |
|
Weighted-average common shares |
|||
|
outstanding |
146,000 |
146,000 |
146,000 |
|
Average total shareholders’ equity |
$3,650,000 |
$3,908,000 |
$2,892,000 |
|
Market price of stock |
$20 |
$18 |
$16 |
Required
a. Calculate earnings per share (EPS) and calculate the P/E ratio for each year.
b. Calculate return on shareholders’ equity for each year.
c. Revise the answers to parts a and b, adjusting the data for the cumulative effect of the change in accounting principle.
d. Comment on the impact these results might have on an investor’s preferences or risks.