Financial statements for Larkins Company appear below: Larkins Company Statement

Question

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders' equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital--common stock
Retained earnings
Total stockholders' equity
Total liabilities & stockholders' equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315





Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.


5. Larkins Company's return on total assets for Year 2 was closest to:
A. 13.6%.
B. 16.0%.
C. 15.3%.
D. 17.0%.
***The answer is NOT C, 15.3%

Explanation / Answer

Larkins Company's dividend payout ratio for Year 2 was closest to: D. 40.6% Dividend payout ratio = Dividends per share Earnings per share = $6.83** $16.83* = 40.6% *Earnings per share = (Net income - Preferred dividends) Average number of common shares outstanding) = ($315 - $12) 18** = $303 18 = $16.83

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