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1) The 2008 financial statements for Fay Thill Country Stores show total assets

ID: 2445493 • Letter: 1

Question

1)

The 2008 financial statements for Fay Thill Country Stores show total assets of $490,000, total liabilities of $290,000, net sales of $1,800,000, net income of $450,000, income from operations of $520,000, cost of goods sold of $1,080,000, preferred dividends of $225,000, and interest expense of $20,000. Total assets and total liabilities for 2007 were $430,000 and $270,000 respectively. Compute the following ratios for 2008:

a. Profit margin

b. Return on assets

c. Return on equity

d. Times-interest-earned

e. Debt ratio

Using this information, a market price of $25 per share, and 100,000 shares of common stock outstanding, compute the following for 2008:

f. Earnings per share

g. Price/earnings ratio

ANSWER:

a) profit margin = net profit / net sales = $450000 / $1800000 = 0.25 = 25%

b) Return on Assets

= net income /Avearge total assets

= $450000 / [( $430000 + $490000) / 2]

= 0.9783

= 97.83 %

c) Return on equity

= net income / Shareholders' equity

= $450000 / ($490000 - $290000)

= 2.25 = 225%

d) Times interest earned

= Operating Income / Interest expense

= $520000 / $20000

= 26

e) Debt ratio

= Debt / equity

= Total liabilities / total assets

= $270000 / $430000

= 0.63

f) Net profit available to common stock holder

= net income - preference dividend

= $450000 - $225000

= $225000

EPS = net income available to common stock holders / number of outstanding shres

= $225000 / 100000

=$2.25

g) Price Earning ratio = Market price of the share / EPS = $25 / $2.25 =11.11

USING THE INFORMATION ABOVE, a market price of $25 per share, and 100,000 shares of common stock outstanding, compute the following for 2008:

1. Earnings per share

2. Price/earnings ratio

Explanation / Answer

a) profit margin = net profit / net sales

= $450000 / $1800000

= 0.25 or 25%

  

b) Return on Assets = net income /Avearge total assets

= $450000 / [( $430000 + $490000) / 2]

= 0.9783 or 97.83 %

c) Return on equity = net income / Shareholders' equity

= net income / (total assets - total liability)

= $450000 / ($490000 - $290000)

= 2.25 or 225%

d) Times interest earned = Operating Income / Interest expense

= $520000 / $20000

= 26

e) Debt ratio = Total liabilities / total assets

= $290000 / $490000

= 0.59

f) EPS = Earning available to common stock holders / number of outstanding shres

= $225000 / 100000

=$2.25

Note: Earning available to common stock holder = net income - preference dividend

= $450000 - $225000

= $225000

g) Price Earning ratio = Market price / EPS

= $25 / $2.25

=11.11