Questions -
1) Metro Bus Company had $400,000 of revenue and $401,000 of expense (including depreciation) for the current year resulting in a $1,000 net loss. All revenues were received in cash. All expenses were paid in cash except for depreciation of $181,000. The Balance sheet reveals $225,000 of Cash and $1,775, 000 of other assets. The Company has no debt and all of the busses are modern - there is no plan to purchase more busses. Although there is sufficient retained earnings, Management has decided to skip the normal $25,000 dividend to the stockholders - "with a $1,000 net loss. Management feels there is not enough cash for the dividend."
What is the Company's Cash flow? What is the difference between cash flow and net income? Evaluate managements statement: "with a $1,000 net loss. Management feels there is not enough cash for the dividend." Evaluate the plan to skip the dividend.
2) In order to compute common earnings per share, preferred dividends are first subtracted from income from continuing operations, and from income before extraordinary items, and from net income; then the remainder is used to compute earning per share. Explain why. When earnings per share is compared to the market price of the stock what statistic is created? Company A has earning per share of $5 and a market price of $40. Company B has earnings per share of $12 and a market price of $120. If each Company has exactly the same amount of risk and potential, which Company is the better buy? Why? Explain.