1.
Calculate earnings per share, dividend yield, dividend payout ratio, price earnings ratio, return on assets, return on stockholders’ equity.
1.
Explanation of Solution
Profitability Ratio:
These ratios evaluate a firm’s ability to earn profits. They help the stakeholders of the company to measure the degree to which funds invested by them are efficiently used. Some of the ratios calculated return on sales, total assets and
(a)
Use the following formula to calculate the value of earnings per share of Company MC:
Substitute $2,640,000 for net income, $300,000 for preference dividend and 1,000,000 for average common shares in the above formula.
Therefore, the value of earnings per share is $2.34 per share.
Use the following formula to calculate the value of earnings per share of Company FA:
Substitute $2,640,000 for net income, $100,000 for preference dividend and 1,200,000 for average common shares in the above formula.
Therefore, the value of earnings per share is $2.12 per share.
(b)
Use the following formula to calculate the value of dividend yield of Company MC:
Substitute $0.54 for dividend per common shares, and $5.00 for market price per common share in the above formula.
Therefore, the value of dividend yield is 0.11.
Use the following formula to calculate the value of dividend yield of Company FA:
Substitute $0.78 for dividend per common shares, and $9.80 for market price per common share in the above formula.
Therefore, the value of dividend yield is 0.08.
(c)
Use the following formula to calculate the value of dividend payout ratio of Company MC:
Substitute $540,000 for common dividend, $2,640,000 for net income and $300,000 for preference dividend in the above formula.
Therefore, the value of dividend payout ratio is 0.23.
Use the following formula to calculate the value of dividend payout ratio of Company FA:
Substitute $940,000 for common dividend, $2,640,000 for net income and $100,000 for preference dividend in the above formula.
Therefore, the value of dividend payout ratio is 0.37.
(d)
Use the following formula to calculate the price-earnings ratio of Company MC:
Substitute $5.00 for market price per share and $2.34 (this amount is calculated in part a) for earnings per share in the above formula.
Therefore, the value of price-earnings ratio is 2.14.
Use the following formula to calculate the price-earnings ratio of Company FA:
Substitute $9.80 for market price per share and $2.12 (this amount is calculated in part a) for earnings per share in the above formula.
Therefore, the value of price-earnings ratio is 4.62.
(e)
Use the following formula to calculate the value of return on assets of Company MC:
Substitute $2,640,000 for net income, $1,000,000 for interest expense, 34% for tax rate and $20,000,000 for average total assets in the above formula.
Therefore, the value of return on assets is 0.17.
Use the following formula to calculate the value of return on assets of Company FA:
Substitute $2,640,000 for net income, $3,000,000 for interest expense, 34% for tax rate and $22,000,000 for average total assets in the above formula.
Therefore, the value of return on assets is 0.21.
(f)
Use the following formula to calculate the value of return on stockholder’s equity of Company MC:
Substitute $2,640,000 for net income, $300,000 for preference dividend and $10,000,000 for average common stockholder’s equity in the above formula.
Therefore, the value of return on stockholder’s equity is 0.23.
Use the following formula to calculate the value of return on stockholder’s equity of Company FA:
Substitute $2,640,000 for net income, $100,000 for preference dividend and $13,000,000 for average common stockholder’s equity in the above formula.
Therefore, the value of return on stockholder’s equity is 0.2.
Working Note:
1. Calculation of dividend per common share of Company MC:
2. Calculation of dividend per common share of Company FA:
2.
Identify the best company for investors. Also, explain the reason.
2.
Explanation of Solution
The profitability ratios show that Company FA is a better option for investors because Company FA has control on all the ratios except earnings per share, dividend yield ratio and return on equity. Therefore, investors should invest in Company FA.
Want to see more full solutions like this?
Chapter 15 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
- Albion Inc. provided the following information for its most recent year of operations. The tax rate is 40%. Required: 1. Compute the following: (a) return on sales, (b) return on assets, (c) return on stockholders equity, (d) earnings per share, (e) price-earnings ratio, (f) dividend yield, and (g) dividend payout ratio. 2. CONCEPTUAL CONNECTION If you were considering purchasing stock in Albion, which of the above ratios would be of most interest to you? Explain.arrow_forwardMike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) return on assets, (b) return on stockholders equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f ) dividend payout ratio. 2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler?arrow_forwardStockholder Payout Ratios The following information pertains to Milo Mindbender Corporation: Required: Calculate the dividend yield, dividend payout, and total payout. (Note: Round answers to two decimal places.)arrow_forward
- The average liabilities, average stockholders' equity, and average total assets are as follows: 1. Determine the following ratios for both companies, rounding ratios and percentagesto one decimal place: a. Return on total assets b. Return on stockholders' equity c. Times interest earned d. Ratio of total liabilities to stockholders' equity 2. Based on the information in (1), analyze and compare the two companies'solvency and profitability. Comprehensive profitability and solvency analysis Marriott International, Inc., and Hyatt Hotels Corporation are two major owners and managers of lodging and resort properties in the United States. Abstracted income statement information for the two companies is as follows for a recent year (in millions): Balance sheet information is as follows:arrow_forwardRequirement 1. Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. a. Acid-test ratio b. Inventory turnover c. Days’ sales in receivables d. Debt ratio e. Earnings per share of common stock f. Price/earnings ratio g. Dividend payoutarrow_forwardSimon Company's year-end balance sheets follow. At December 31 Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Long-term notes payable Common stock, $10 par value Retained earnings Total liabilities and equity Interest expense Income tax expense Total costs and expenses Net income Current Year $ 35,467 102,794 127,925 11,888 335,329 $ 613,403 For both the current year and one year ago, compute the following ratios: ه له مه له :. .: له The company's income statements for the Current Year and 1 Year Ago, follow. For Year Ended December 31 Sales Cost of goods sold Other operating expenses $ 149,683 117,626 162,500 183,594 $ 613,403 $ 486,429 247,201 Current Year 13,556 10,367 Vanu $ 797,424 Earnings per share Additional information about the company follows. Common stock market price, December 31, Current Year Common stock market price, December 31, 1 Year Ago Annual cash dividends per share…arrow_forward
- Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. Debt Ratio Earning per share of common stocks Price/earning ration Dividend payoutarrow_forwardcalculate the ratio (expressed to two decimal places) that would reflect each of the following: The amount of funds available relative to sales, to pay the company’s expenses other than its cost of sales (expressed as a percentage) The company's net income as a percentage of the company's net sales.The ability of the company to generate profits from its shareholders investments in the company.A measure of the dividend pay-out per share of the company's ordinary shares. The capacity of the company to pay off its current commitments using just its most liquid assets.The degree to which the company’s assets are financed by debt. A measure of how easily the company can pay the interest on its outstanding debt.arrow_forwardBoth companies pay dividends of $5.20 per share and their stock prices are both at $102.50. Evaluate these companies from the perspective of an investor using appropriate financial ratios.arrow_forward
- Dear Bartleby, could you please assist me with solving this question and please provide the calculations, thank you. Assume that Ellis Inc. reported basic earnings per share and cash dividends per share of $3.00 and $1.20, respectively, for Year 1 and that in Year 2, the firm had a 2-for-1 stock split. In the annual report for Year 2, earnings per share (EPS) and dividends per share (DPS) for Year 1 should be reported as:arrow_forwardConsider the following information about Truly Good Coffee, Inc.: a. The company's book value. b. Its book value per share. c. The stock's earnings per share (EPS). d. The dividend payout ratio. e. The dividend yield on the common stock. f. The dividend yield on the preferred stock. a. The company's book value is $ Data table (Click on the icon here a spreadsheet.) Total assets Total debt million. (Round to the nearest million.) Preferred stock Common stockholders' equity Net profit after taxes Use the information in the table to find the following: in order to copy its contents of the data table below into Number of preferred stock outstanding Number of common stock outstanding Preferred dividends paid Common dividends paid Market price of the preferred stock Market price of the common stock $179 million $85 million $19 million $75 million $14.4 million I 0.8 million shares 8 million shares $2.94/share $1.07/share $25.56/share $21.09/share Xarrow_forwardThe Gizmo, Inc. has just announced year-end results as follows: a. Calculate the book value per share. b. Calculate earnings per share. c. Calculate Gizmo, Inc.'s dividend yield. d. Calculate the market-to-book ratio. a. The book value per share is $ Value of company assets Value of company liabilities Net income Common stock dividends Preferred stock dividends (Round to the nearest cent.) Number of shares of common stock outstanding Closing price of Gizmo, Inc.'s stock $11,440,000 $5,597,242 $1,661,997 $180,572 $427,107 831,680 $43.77 per sharearrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningCentury 21 Accounting Multicolumn JournalAccountingISBN:9781337679503Author:GilbertsonPublisher:Cengage
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning