Exercise 10-15 Calculate and analyze ratios (LO10-8) The financial statements of

Question

Exercise 10-15 Calculate and analyze ratios (LO10-8)

The financial statements of Friendly Fashions include the following selected data (in millions):

Required:
Calculate the following ratios for Friendly Fashions in 2018. (Enter your Dividend yield and Price-earning ratio values to two decimal places. Enter your answer in millions (i.e. 5,500,000 should be entered as 5.5).)

2018 2017 $ 8,043 $ 9,134 $ 140 $ 618 $ 1,750 2,250 (S in millions) Sales Stockholders' equity Average Shares outstanding (in millions) Dividends per share Stock price 725 $ 31 $ 8.90

Explanation / Answer

1. Return on equity = Net income / Average common equity

where, average common equity = Equity in 2017+Equity in 2018/2= $2250+$1750/2 = $4000/2= $2000

Return on equity = $140/$2000= 0.07 or 70%

2. Dividend yield = Dividend per share / stock price

= $0.31/$8.9= 0.03 or 3%

3. Earnings per share = Net income / Average shares outstanding

= $140/725= $0.19

4. Price- earnings ratio= Stock price per share / net income or earnings per share

Where, Earnings per share = Net income/ Average shares outstanding

= $140/725= $0.19

Price-earnings ratio = $8.9/$0.19= 46.84

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