Exercise 15-19 Shown below is the liabilities and stockholders’ equity section o

Question

Exercise 15-19

Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,410,100.

Jana Kingston Co.

Mary Ann Benson Co.

For the year, each company has earned the same income before interest and taxes.

Jana Kingston Co.

Mary Ann Benson Co.

At year end, the market price of Kingston’s stock was $101 per share, and Benson’s was $63.50. Assume balance sheet amounts are representative for the entire year.

(a) Calculate the return on total assets? (Round answers to 2 decimal places, e.g. 16.85%.)

Return on total assets

Return on common stock
equity

Net income per share

Book value per share

Jana Kingston Co.

Mary Ann Benson Co.

Current liabilities $318,400 Current liabilities $760,400 Long-term debt, 8% 1,260,000 Common stock ($20 par) 2,930,000 Common stock ($20 par) 2,112,000 Retained earnings (Cash dividends, $326,400) 719,700 Retained earnings (Cash dividends, $223,100) 719,700 $4,410,100 $4,410,100

Explanation / Answer

a) Return on Total Assets: Net Income/Total Assets

Kingston Company = 613910/4410100 = 13.92%

Benson company = 669350/4410100 = 15.18%

Benson company is more profitable in terms of return on total assets, if net income is taken as the numerator.

This ratio can be calculated with EBIT or EBIT (1-tax rate) as the numerator, in which case both the companies have the same return on total assets.

b) Return on Common stock equity:

is given by Net income/Averaged Equity funds

Balance sheet figures as at the end of the year are taken as representative figures for avarage of equity as directed in the question. Other wise equity should be average of opening and closing balances.

Kingston company = (613910)/(2112000+719700) = 21.68%

Benson company = (669350/(2930000+719700) = 18.34%

c) Net Income per share = Net Income/ No or common shares outstanding

Kingston company = 613910/105600 = $5.81

Benson company = 669350/146500 = $4.57

Kingston company has greater net income per share of stock.

d) Yes. From the point of view of Net income it is advantageous to the stock holders of Jana Kingston to have long term debt outstanding, as the leverage helps in magnigying the returns to equity, as can be seen from its higher ROE of $21.68%. In contrast, Benson company has no long term debt, but has lower ROE @ 18.34%. The EPS (with same par value) is also higher for kingston.

e) Book Value per share:

Kingston company = 2112000+719700/105600 = $26.82

Benson company = 2930000+719700/146500 = $24.91

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