1. The Monley Corporation of New Jersey has gross profits of $980,000 and $260,000 in depreciation expense. The Majors Corporation of Nebraska also has $980,000 in gross profit, with $60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company.

Compute the cash flow for both companies with a tax rate of 40%. Explain the difference in cash flow between the two firms.

2. Assume Ford Motors had earnings after taxes of 460,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $42.50. In 2010, earnings after taxes increase to $650,000 with the same 200,000 shares outstanding. The stock price was $70.00.

a. Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share.

1. To compute the cash flow for both companies, we first need to calculate the earnings before tax (EBT) for each company. EBT is computed by subtracting the depreciation expense and selling/administrative expenses from the gross profit.

For Monley Corporation:
EBT = Gross Profit - Depreciation Expense - Selling/Administrative Expenses
= $980,000 - $260,000 - $120,000
= $600,000

For Majors Corporation:
EBT = Gross Profit - Depreciation Expense - Selling/Administrative Expenses
= $980,000 - $60,000 - $120,000
= $800,000

Next, we calculate the taxes using the tax rate of 40%. Taxes are computed by multiplying the EBT by the tax rate.

For Monley Corporation:
Taxes = EBT * Tax Rate
= $600,000 * 0.40
= $240,000

For Majors Corporation:
Taxes = EBT * Tax Rate
= $800,000 * 0.40
= $320,000

To get the cash flow for each company, we need to subtract the taxes from the EBT.

For Monley Corporation:
Cash Flow = EBT - Taxes
= $600,000 - $240,000
= $360,000

For Majors Corporation:
Cash Flow = EBT - Taxes
= $800,000 - $320,000
= $480,000

The difference in cash flow between the two firms is $480,000 - $360,000 = $120,000. Majors Corporation has a higher cash flow compared to Monley Corporation.

2. To compute the earnings per share (EPS) and the P/E ratio for 2009, we need to divide the earnings after taxes (EAT) by the number of shares outstanding.

For Ford Motors in 2009:
EPS = EAT / Number of Shares
= $460,000 / 200,000
= $2.30

The P/E ratio is calculated by dividing the stock price by the earnings per share.

P/E Ratio = Stock Price / EPS
= $42.50 / $2.30
= 18.48

So, the earnings per share for 2009 is $2.30, and the P/E ratio is 18.48.