The 2015 financial statements for the Ernst and Young companies are summarized h

Question

The 2015 financial statements for the Ernst and Young companies are summarized here Ernst Company Young Company Balance sheet Cash Accounts receivable (net) Inventory Operational assets (net) Other assets $ 41,700 38,200 100,700 140,400 84,000 $ 21,700 31,800 42,000 402,600 306,200 Total assets $ 405,000 804,300 Current liabilities Long-term debt (8%) Capital stock (par $10) Contributed capital in excess of par Retained earnings $ 97,700 64,900 149,100 30,100 63,200 $ 48,300 58,400 511,100 105,300 81,200 Total liabilities and stockholders' equity $ 405,000 804,300 Income statement Sales revenue (1/3 on credit) Cost of goods sold Expenses (including interest and income tax) $802,700 $447,000 (241,900) (16,200) (398,100) (311,700) Net income $188,900 $ 92,900 Selected data from the 2014 statements Accounts receivable (net) Inventory Long-term debt Other data Per share price at end of 2015 (offering price) Average income tax rate Dividends declared and paid in 2015 $ 19,500 95,800 61,400 $ 39,000 44,400 49,400 19 $17 $ 33,500 $148,300

Explanation / Answer

Ernst Young Test of Profitability 1 Return on equity 77.93 13.32 2 Return on Assets 46.64 11.55 4 Earnings per share 12.67 1.82 5 Profit Margin 42.26 11.57 1) Return on equity It simply measures income earned on the amount of investment made by investors = Net Income / Shareholders Equity Shareholders equity will constitute capital stock , capital in excess of par value & retained earnings For Ernst =188900 / (149100+30100+63200) = 188900 / 242400 77.93% For Young = 92900 / ( 511100 + 105300+ 81200) = 92900 / 697600 13.32% 2) Return on Assets It measures net income to total amount of investment made in form of assets = Net Income / Total Assets For Ernst = 188900 / 405000 46.64% For Young = 92900 / 804300 11.55% 4) Earnings per share It measures earning made per share = Net Income / Number of shares held Number of shares can be calculated as For Ernst = Capital stock / par value = 149100 / 10 , =14910 Earnings per share = 188900 / 14910 12.67 For Young Number of shares = Capital stock / par value = 511100 / 10, = 51110 Earnings per share = 92900 / 51110 1.82 5) Profit Margin It measures profit earned as a % to sale revenue For Ernst = 188900 / 447000 42.26% For Young = 92900 / 802700 11.57%

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