Profitability Ratios Mike Sanders is considering the purchase of Kepler Company,

Question

Profitability Ratios

Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.

Also, assume that for last year and for the current year, the market price per share of common stock is $2.98. In addition, for last year ratio computations, assets and equity were the same at the beginning and end of the year.

Required:

Note: Round all answers to two decimal places.

Kepler Company Comparative Balance Sheets This Year   Last Year Assets Current assets: Cash $ 50,000 $100,000 Accounts receivable, net 300,000 150,000 Inventory 600,000 400,000 Prepaid expenses 25,000 30,000 Total current assets $ 975,000 $680,000 Property and equipment, net 125,000 150,000 Total assets $1,100,000 $830,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 400,000 $290,000 Short-term notes payable 200,000 60,000 Total current liabilities $ 600,000 $350,000 Long-term bonds payable, 12% 100,000 150,000 Total liabilities $ 700,000 $500,000 Stockholders' equity: Common stock (100,000 shares) 200,000 200,000 Retained earnings 200,000 130,000 Total liabilities and stockholders' equity $1,100,000 $830,000 1. Compute the following for each year: This Year Last Year 10 X 10 X a. Return on assets b. Return on stockholders' equity C. Earnings per share d. Price-earnings ratio e. Dividend yield f. Dividend payout 2. Conceptual Connection: Based on the analysis in Requirement 1, would you invest in the common stock of Kepler? 27| X % 0.98 V 0.79 3.04 3.77 0.28 V 0.24 | No X Feedback Check My Work 1a. Return on Total Assets Net Income + [Interest Expense x (1-Tax Rate)/Average Total Assets 1b. Return on Stockholders' Equity = (Net Income-Preferred Dividends)/Average Common Stockholders' Equity Average Common Stockholders' Equity (Beginning and Ending Common Stockholders' Equity)/2 *Common Stockholders' Equity = Common Stock + Additional Paid-in Capital + Retained Earnings 1c. Earnings per Share - (Net Income - Preferred Dividends) Average Common Shares 1d. Price-Earnings Ratio- Market Price per Share/Earnings per Share le. Dividend Yield Dividend per Common Share/Market Price per Common Share Dividends per Share Common Dividends/Number of Common Shares 1f. Dividend Payout Ratio Common Dividends/(Net Income - Preferred Dividends) Learning Objective 2 and Learning Objective 5

Explanation / Answer

1(a) Return on Total assets

Current year = 105000 / 965000 * 100 = 10.88 %

Numerator = Net Income + Interest after tax = 97800 + 12000 * ( 1 - 0.40 ) = 105000

Denominator = Average Assets = ( 1100,000 + 830,000 ) / 2 = 965000

Last Year =

Numerator = Net Income + Interest after tax = 79200 + 18000 * ( 1 - 0.40 ) = 90000

Denominator = Average Assets = 830,000

90000 / 830000 * 100 = 10.84 %

1(b). Return on share holders equity

Curreent year = 70000 / 365000 * 100 = 19.18 %

Numerator = Net earning to equity holder = 70000

Average Equity = ( 400,000 + 330,000 ) / 2 = 365000

1 (e) Dividend Yield

= Dividend per share / Market price per share

Current year = 0.278 / 2.98 * 100 = 9.33 %

Previous year = 0.192 / 2.98 * 100 = 6.44 %

Note : I had answered only those answers with wrong marking. If you want answers for correct ones also .........plz put a comment, so that I will revise or edit my answer.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.