Q7. An investor relations spokesperson for the Square Door Corporation was quoted as saying that Square Door

   shares were a bargain, selling at a price-to-earnings (P/E) ratio of 12, relative to the S& 500 average P/E of 15.3.

   The financial statements reported net earnings of $126 million, or $4.00 per share. The notes to the financial

   statements included a statement that income for the year included a $31.5 million (after-tax) gain from the

   reclassification of certain assets from its investment portfolio to its trading portfolio. What would be the normalized

P/E?

A)     16.

B)     15.

C)     13.

Q8. National Chemical Corp. (NCC) reports 2003 net earnings of $354.2 million. NCC’s financial statements and disclosures also

indicate pretax impairment charges of $78.1 million and pretax amortization of $24.9 million. NCC also reports an after-tax loss

of $23.4 million on the early retirement of debt and receipt of $118 million after-tax from an insurance claim. NCC effective tax

rate is 36%. What are the normal operating earnings of NCC?

A)   $414.68 million.

B)   $480.60 million.

C)   $325.52 million.

Q7. An investor relations spokesperson for the Square Door Corporation was quoted as saying that Square Door fficeffice" />

   shares were a bargain, selling at a price-to-earnings (P/E) ratio of 12, relative to the S& 500 average P/E of 15.3.

   The financial statements reported net earnings of $126 million, or $4.00 per share. The notes to the financial

   statements included a statement that income for the year included a $31.5 million (after-tax) gain from the

   reclassification of certain assets from its investment portfolio to its trading portfolio. What would be the normalized

P/E?

A)     16.

B)     15.

C)     13.

Correct answer is A)

Since the P/E ratio was 12 and EPS was $4, the price of the stock was $48 (12 × 4).  After removing the nonrecurring gain, earnings will be $94.5 million (126 ? 31.5).  We know the number of shares is 31.5 million (126 Million ÷ 4).  So the new EPS number is 3 (94.5 million ÷ 31.5 million) and new P/E ratio is 16 (48 ÷ 3).

Q8. National Chemical Corp. (NCC) reports 2003 net earnings of $354.2 million. NCC’s financial statements and disclosures also

indicate pretax impairment charges of $78.1 million and pretax amortization of $24.9 million. NCC also reports an after-tax loss

of $23.4 million on the early retirement of debt and receipt of $118 million after-tax from an insurance claim. NCC effective tax

rate is 36%. What are the normal operating earnings of NCC?

A)   $414.68 million.

B)   $480.60 million.

C)   $325.52 million.

Correct answer is C)

NCC’s normal operating earnings are calculated as:

Net income		354.20
+ After-tax impairment charge	78.1 × (1 - 0.36) =	49.98
+ After-tax amortization charge	24.9 × (1 - 0.36) =	15.94
+ After-tax loss on debt retirement		23.40
? After-tax insurance settlement		118.00
Normal operating earnings		325.52

Recall that all adjustments are made on an after-tax basis.