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ACCTG 101 Lecture Notes - Lecture 26: Preferred Stock, Income Statement, Dividend Yield

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ochrehornet578
14 Sep 2020
School
GCC
Department
Accounting
Course
ACCTG 101
Professor
Margaryan

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Document Summary

Another measure of profitability is return on stockholders" equity which is computed by dividing net income by average total stockholders" equity. In contrast to return on assets, this metric emphasizes the rate at which income is earned relative to the amount invested by the stockholders. The stockholders" equity balance may vary throughout a period. For example, a business may issue or retire stock, pay dividends, and earn net income. If monthly amounts are not available, the average of the stockholders" equity at the beginning and the end of the year is normally used to compute this ratio. For most businesses, return on equity is usually higher than return on assets. This occurs when the amount earned on assets acquired with creditors" funds is more than the interest paid to creditors. This difference in the rate of return on stockholders" equity and the rate of return on assets is called leverage.

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Related Questions

Select the incorrect statement regarding thereturn on equity (ROE) measure.

A.

ROE is used to measure the profitability of the firm in relationto the amount invested by stockholders.
B.

A company's ROE is lower than its return on investment becauseROE does not consider that part of the business that is financed bydebt.
C.

ROE is affected by a company's use of leverage.
D.

ROE equals net income divided by total stockholders' equity.

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:
Lydex Company
Comparative Balance Sheet
This Year Last Year
Assets
Current assets:
Cash $ 1,000,000 $ 1,240,000
Marketable securities 0 300,000
Accounts receivable, net 2,860,000 1,960,000
Inventory 3,640,000 2,400,000
Prepaid expenses 270,000 210,000
Total current assets 7,770,000 6,110,000
Plant and equipment, net 9,600,000 9,090,000
Total assets $ 17,370,000 $ 15,200,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 4,050,000 $ 3,060,000
Note payable, 10% 3,700,000 3,100,000
Total liabilities 7,750,000 6,160,000
Stockholders' equity:
Common stock, $75 par value 7,500,000 7,500,000
Retained earnings 2,120,000 1,540,000
Total stockholders' equity 9,620,000 9,040,000
Total liabilities and stockholders' equity $ 17,370,000 $ 15,200,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,900,000 $ 13,980,000
Cost of goods sold 12,720,000 10,485,000
Gross margin 3,180,000 3,495,000
Selling and administrative expenses 1,410,000 1,620,000
Net operating income 1,770,000 1,875,000
Interest expense 370,000 310,000
Net income before taxes 1,400,000 1,565,000
Income taxes (30%) 420,000 469,500
Net income 980,000 1,095,500
Common dividends 400,000 547,750
Net income retained 580,000 547,750
Beginning retained earnings 1,540,000 992,250
Ending retained earnings $ 2,120,000 $ 1,540,000

To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
Current ratio 2.3
Acid-test ratio 1.1
Average collection period 32 days
Average sale period 60 days
Return on assets 9.7 %
Debt-to-equity ratio .65
Times interest earned ratio 5.7
Price-earnings ratio 10
Required:
1.

You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)
a. The times interest earned ratio.
b. The debt-to-equity ratio.
c. The gross margin percentage.
d. The return on total assets. (Total assets at the beginning of last year were $13,110,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,492,250. There has been no change in common stock over the last two years.)

f. Is the company’s financial leverage positive or negative?

2.

You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $102 per share and that at the end of last year it was $70. For both this year and last year, compute: (Round your intermediate calculations and final percentage answers to 1 decimal place. i.e., 0.123 should be considered as 12.3%. Round the rest of the intermediate calculations and final answers to 2 decimal places.)
a. The earnings per share.
b. The dividend yield ratio.
c. The dividend payout ratio.
d. The price-earnings ratio.
e.

The book value per share of common stock.

3.

You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute: (Use 365 days in a year. Round "days" intermediate calculations and final answers to 1 decimal place. Round all other intermediate calculations and final answers to 2 decimal places.)
a. Working capital.
b. The current ratio.
c. The acid-test ratio.
d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,710,000.)
e. The average sale period. (The inventory at the beginning of last year totaled $2,070,000.)
f. The operating cycle.
g. The total asset turnover. (The total assets at the beginning of last year totaled $14,650,000.)

Problem 13-15A Comprehensive Ratio Analysis [LO13-2, LO13-3,LO13-4, LO13-5, LO13-6]

[The followinginformation applies to the questions displayed below.]

You have just been hired as a financial analyst for LydexCompany, a manufacturer of safety helmets. Your boss has asked youto perform a comprehensive analysis of the company’s financialstatements, including comparing Lydex’s performance to its majorcompetitors. The company’s financial statements for the last twoyears are as follows:
Lydex Company
Comparative Balance Sheet
This Year Last Year
Assets
Current assets:
Cash $ 940,000 $ 1,180,000
Marketable securities 0 300,000
Accounts receivable, net 2,620,000 1,720,000
Inventory 3,580,000 2,300,000
Prepaid expenses 250,000 190,000
Total current assets 7,390,000 5,690,000
Plant and equipment, net 9,480,000 9,030,000
Total assets $ 16,870,000 $ 14,720,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 3,990,000 $ 2,940,000
Note payable, 10% 3,660,000 3,060,000
Total liabilities 7,650,000 6,000,000
Stockholders' equity:
Common stock, $75 parvalue 7,500,000 7,500,000
Retained earnings 1,720,000 1,220,000
Total stockholders' equity 9,220,000 8,720,000
Total liabilities and stockholders' equity $ 16,870,000 $ 14,720,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,840,000 $ 13,380,000
Costof goods sold 12,672,000 10,035,000
Gross margin 3,168,000 3,345,000
Selling and administrative expenses 1,602,000 1,596,000
Netoperating income 1,566,000 1,749,000
Interest expense 366,000 306,000
Netincome before taxes 1,200,000 1,443,000
Income taxes (30%) 360,000 432,900
Netincome 840,000 1,010,100
Common dividends 340,000 505,050
Netincome retained 500,000 505,050
Beginning retained earnings 1,220,000 714,950
Ending retained earnings $ 1,720,000 $ 1,220,000

To begin yourassigment you gather the following financial data and ratios thatare typical of companies in Lydex Company’s industry:

Current ratio 2.4
Acid-test ratio 1.1
Average collection period 40 days
Average sale period 60 days
Return on assets 9.1 %
Debt-to-equity ratio .69
Times interest earned ratio 5.7
Price-earnings ratio 10

You decide first to assess the company’s performance in terms ofdebt management and profitability. Compute the following for boththis year and last year: (Round your intermediatecalculations and final percentage answers to 1 decimal place. i.e.,0.123 should be considered as 12.3%. Round the rest of theintermediate calculations and final answers to 2 decimalplaces.)

a. The timesinterest earned ratio.
b. Thedebt-to-equity ratio.
c. The gross marginpercentage.
d. The return ontotal assets. (Total assets at the beginning of last year were$13,050,000.)
e. The return onequity. (Stockholders’ equity at the beginning of last year totaled$8,214,950. There has been no change in common stock over the lasttwo years.)

f.Is the company’s financial leverage positive or negative?

Part 2

2.

You decide next to assess the company’s stock marketperformance. Assume that Lydex’s stock price at the end of thisyear is $90 per share and that at the end of last year it was $58.For both this year and last year, compute: (Round yourintermediate calculations and final answers to 2 decimal places.For percentages 0.1234 should be considered as12.34%.)
a. The earnings pershare.
b. The dividendyield ratio.
c. The dividendpayout ratio.
d. Theprice-earnings ratio.
e.

The book value per share of common stock.

Part 3

3.

You decide, finally, to assess the company’s liquidity and assetmanagement. For both this year and last year, compute: (Use365 days in a year. Round your intermediate calculations and finalanswer to 2 decimal places.)
a. Workingcapital.
b. The currentratio.
c. The acid-testratio.
d. The averagecollection period. (The accounts receivable at the beginning oflast year totaled $1,650,000.)
e. The average saleperiod. (The inventory at the beginning of last year totaled$2,010,000.)
f. The operatingcycle.
g. The total assetturnover. (The total assets at the beginning of last year totaled$13,050,000.)