Gross margin percentage. (Round your answer to 1 decimal place.) b. Earnings per
ID: 2459128 • Letter: G
Question
Gross margin percentage. (Round your answer to 1 decimal place.)
b.
Earnings per share of common stock. (Round your answer to 2 decimal places.)
c.
Price-earnings ratio. (Round your intermediate calculations to 2 decimal places and final answer to 1 decimal place.)
d.
Dividend payout ratio. (Round your intermediate calculations to 2 decimal places and final answer to 1 decimal place.)
e.
Dividend yield ratio. (Round your answer to 2 decimal places.)
f.
Return on total assets. (Round your intermediate calculations and final answer to 2 decimal places.)
g.
Return on common stockholders' equity. (Round your answer to 2 decimal places.)
h.
Book value per share. (Round your answer to 2 decimal places.)
i.
Working capital.
j.
Current ratio. (Round your answer to 2 decimal places.)
k.
Acid-test ratio. (Round your answer to 2 decimal places.)
l.
Accounts receivable turnover. (Round your answer to 2 decimal places.)
m.
Average collection period. (Assume 365 days a year and round your answer to 1 decimal place.)
n.
Inventory turnover. (Round your answer to 2 decimal places.)
o.
Average sale period. (Assume 365 days a year and round your answer to 1 decimal place.)
p.
Times interest earned. (Round your answer to 2 decimal places.)
q.
Debt-to-equity ratio. (Round your answer to 2 decimal places.)
a.Gross margin percentage. (Round your answer to 1 decimal place.)
Statement of Financial Position December 31, Year 2 and Year1 (in thousands of dollars) Year 2 Year1 Assets Current assets Accounts receivable Inventory Prepaid expenses $ 320 $ 430 440 450 120 540 330 120 Total current assets Plant and equipment, net 1,310 1,440 3,150 2,930 Total assets $4,460 $4,370 Liabilities and Stockholders Equity Current liabilities: $ 460 $ 390 160 200 Accounts payable 105 320 Accrued liabilities Notes payable, short term Total current liabilities Bonds payable Total liabilities Stockholders' equity 885 465 750 570 1,350 1,320 Preferred stock, $100 par value, 10% Common stock, $1 par value Additional paid-in capital--common stock Retained earnings 1,2501,250 620 680 500 620 680 560 Total stockholders' equity 3,110 3,050 Total liabilities & stockholders' equity $4,460 $4,370 Income Statement For the Year Ended December 31, Year 2 (in thousands of dollars) Sales (all on account) Cost of goods sold $ 5,490 3,570 Gross margin Selling and administrative expense 1,920 1,171 749 Net operating income Interest expense 707 Net income before taxes Income taxes (30%) Net income $ 495 Dividends on common stock during Year 2 totaled $310 thousand. Dividends on preferred stock totaled $125 thousand. The market price of common stock at the end of Year 2 was $9.58 per share Required: Compute the following for Year 2Explanation / Answer
a. Gross Margin Percentage is the percentage of Gross profit to the Total sales. Hence the Gross margin ratio is calculated as below:
Gross Margin / Total Sales = $1,920/$5,490 * 100 = 35.0% (Rounded off to 1 decimal)
b. An Earnings Per share of common stock is the amount of profit available per outstanding share. It is calculated using the formula:
Earnings per share = (Net Profit after Taxes – Preference Dividends) / Number of Equity Shares
= ($495-$125)/$620 = $370/$620 = $0.60 (Rounded off to 2 decimals)
c. Price-Earnings ratio is the ratio of the current market price in relation to the earnings per share. Current market price is $9.58 per share
Price-Earnings ratio = Current market price / Earnings per share
= $9.58/$0.60 = 16.0 times (Rounded off to 1 decimal)
d. Dividend payout ratio is the ratio between the total dividend and its net income available for its common stock holders. It is calculated using the formula:
Dividend payout ratio = Dividend per share / Earnings per share * 100
An earnings per share is calculated in b above. Dividend per share is calculated as below:
Dividends on common stock / Number of common stocks = $310/$620 = 0.50(Rounded off to 2 decimals)
Dividend payout ratio = $0.50/$0.60 * 100 = 83.3% (Rounded off to 1 decimal)
e. Dividend Yield Ratio is the ratio of dividend per share compared to its market value of share. It is calculated as below:
Dividend yield ratio = Dividend per share/Market value per share * 100
Taking the values from above,
Dividend yield ratio = $0.50/$9.58 * 100 = 5.22% (Rounded off to 2 decimals)
f. Return on total assets is the measurement of company’s profit before interest and tax as a ratio of total assets. In this case Profit before interest and tax is the Net Operating income given in the income statement.
Return on total assets = Net Operating income/ total assets * 100
= $749/$4,460 *100 = 16.79% (Rounded off to 2 decimals)
g. Return on common stockholders’ equity is the ratio of net profit available to common stock holders to the average common stockholder’s equity. If there are any preference stock and preference dividend paid, the net profit and average common stockholder’s equity need to be adjusted for these amounts.
Net profit available for common stockholders = Net Income – Preferred Dividend
= $495 - $125 = $370
Common stockholders’ equity = Common Stock + Additional Paid-in capital + Retained earnings
Year 1 = $620 + $680 + $500 = $1,800
Year 2 = $620 + $680 + $560 = $1,860
So Average common stockholders’ equity = (Year 1 equity + Year 2 equity)/2
= ($1,800 + $1,860)/2 = $1,830
Return on Common stockholders’ equity = Net profit available for common stockholders/Average common stockholders’ equity * 100
= $370/$1,830 * 100 = 20.22% (Rounded off to 2 decimals)
h. Book value per share is the value of stockholders’ equity compared to the total shares outstanding. It is calculated using the formula:
Book value per share = Common stockholders’ equity/Average number of common stock
Common stockholders’ equity as calculated above is $1,860 and Average number of common stock is 620
Book value per share = $1,860/620 = $3.00 (Rounded off to 2 decimals)
i. Working Capital is the net liquid assets available for a company. This is the short-term realizable capital. It is calculated using the formula:
Working Capital = Current assets – Current liabilities
= $1,310 - $885 = $425
j. Current ratio is a ratio that measures the proportion of current assets to its current liabilities. It is calculated using the formula:
CURRENT RATIO=CURRENT ASSETS / CURRENT LIABILITIES
= $1,310/$885 * 100 = 1.48 (Rounded off to 2 decimals)
k. Acid-test Ratio measures the relationship between quick/liquid assets and current liabilities. Quick Assets = Current Assets – Inventory = $1,310 - $330 = $980
Acid-test Ratio is calculated using the formula:
ACID TEST RATIO = QUICK ASSETS / CURRENT LIABILITIES
= $980/$885 = 1.11 (Rounded off to 2 decimals)
l. Accounts receivable Turnover ratio indicates the number of times the debtors are turned over during a year. It is calculated using the formula:
ACCOUNTS RECEIVABLE TURNOVER RATIO = NET CREDIT ANNUAL SALES / AVERAGE ACCOUNTS RECIEVABLE
Average Accounts receivable = (Opening Accounts receivable + Closing Accounts receivable)/2 = ($440 + $540)/2 = $490
Accounts receivable turnover ratio = $5,490/$490 = 11.20 (Rounded off to 2 decimals)
m. Average collection period represents the average number of days for which a company has to wait before its receivables are converted into cash. It is calculated using the formula:
AVERAGE COLLECTION PERIOD = NUMBER OF WORKING DAYS / ACCOUNTS RECEIVABLE TURNOVER RATIO = 365/11.20 = 32.6 days (Rounded off to 1 decimal)
n. Inventory Turnover indicates the number of times the stock has been turned over during the period. It is calculated using the formula:
INVENTORY TURNOVER RATIO = COST OF GOODS SOLD FOR THE YEAR / AVERAGE INVENTORY FOR THE YEAR
Average Inventory = (Opening Inventory + Ending Inventory)/2 = ($450 + $330)/2 = $390
Inventory Turnover ratio = $3,570/$390 = 9.15 (Rounded off to 2 decimals)
o. Average Sale period measures the number of days it takes to sell the entire inventory. It is calculated using the formula:
Average Sale period = Number of working days / Inventory Turnover
= 365/9.15 = 39.9 days (Rounded off to 1 decimal)
p. Time interest earned is the amount of income that can be used to cover the interest expenses in the future. It is calculated using the formula,
TIME INTEREST EARNED RATIO = INCOME BEFORE INTEREST AND TAXES/ INTEREST EXPENSE
Hence Time interest earned ratio = $749/$42 = 17.83(Rounded off to 2 decimals)
q. Debt-to-Equity Ratio indicates the proportionate claims of owners and the outsiders against the firm’s assets. It is calculated using the formula:
DEBT-TO-EQUITY RATIO = TOTAL DEBT / SHAREHOLDERS FUNDS (EQUITY)
= $1,350/$3,110 = 0.43(Rounded off to 2 decimals)
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