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.
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