Dakota Inc. and Jersey & Company are two large companies that manufacture and se

Question

Dakota Inc. and Jersey & Company are two large companies that manufacture and sell equipment used in the construction, mining, agricultural, and forestry industries. The companies reported the following data (in millions) for two recent years:

a. Determine the earnings per share in Year 2 and Year 1 for each company. Round your answers to two decimal places.

b. Evaluate the relative profitability of the two companies.

earnings per share for Year 1 and Year 2 are higher than . However, from Year 1 to Year 2, the earnings per share for both companies . The slowing world economy contributed to the from Year 1 to Year 2. Overall, appears to be the more profitable company.

Dakota Jersey Year 2 Year 1 Year 2 Year 1 Net income $2,107 $3,725 $1,905 $3,237 Average number of common shares outstanding 594 599 334 363

Explanation / Answer

Earnings per share is the income that is attributable to each share in the Company. It is a very commonly used measure for relative profitability.

Question a

The Earnings per share(EPS) for a Company is computed as Net Income divided by the Average Number of Common shares outstanding. In the above case:

i. Earnings per share for Dakota Inc. is -

   Year 1 EPS = 3725/599 = $6.21 per Share

   Year 2 EPS = 2107/594 = $3.55 per Share

ii. Earnings per share for Jersey & Company is -

   Year 1 EPS = 3237/363 = $8.91 per Share

   Year 2 EPS = 1905/334 = $5.70 per Share

Question b

From the above calculations it is clear that Jersey & Company's earning per share for Year 1 and Year 2 are higher than Dakota Inc.'s.

However, from Year 1 to Year 2, the earnings per share for both companies has fallen.

Dakota Inc. - (6.21 - 3.55)/6.21 = 42.83%

Jersey & Co. - (8.91-5.70)/8.91 = 36.02%

The above reduction has been calculated as (Year 1 EPS - Year 2 EPS)/Year 1 EPS

It appears that the slowing world economy contributed to the fall in EPS from Year 1 to Year 2 by the following amounts -

Dakota Inc. - $6.21 - $3.55 = $2.66 per share

Jersey & Co. - $8.91 - $5.70 = $3.21 per share

In terms of relative proftiability, Jersey & Co.(EPS year 1 - $8.91 and EPS year 2 - $5.70) appears to be more profitable than Dakota Inc.(EPS year 1 - $6.21 and EPS year 2 - $3.55)

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