2. Rate earned on stockholders equity 3. Rate earned common stock equity 4. Earn

Question

2. Rate earned on stockholders equity 3. Rate earned common stock equity 4. Earnings per shar on common stock 5. Price-earnings ratio on common stock and yield on common stock


Current Year $745,000 1,510,000 Preceding Year $820,000 1,400,000 Current assets Property, plant, and equipment Current liabilities (non-interest-bearing) Long-term liabilities, 12% Preferred 10% stock Common stock, $25 par Retained earnings, beginning of year Net income for year Preferred dividends declared Common dividends declared 160,000 400,000 250,000 1,200,000 140,000 400,000 250,000 1,200,000 230,000 110,000 (25,000) (70,000) 160,000 155,000 (25,000) (60,000) Round your answers to one decimal place except earnings per share, which should be rounded to the nearest cent. a. Rate earned on total assets 4% b. Rate earned on stockholders equity c. Rate earned on common stockholders' equity 9% d. Earnings per share on common stock e. Price-earnings ratio on common stock f. Dividend yield on common stock

Explanation / Answer

a) Rate earned on total assets = Net Income/Average Total Assets

= 110,000/(745,000+1,510,000+820,000+1,400,000)/2 = 110,000/2,237,500 = 4.9%

b) Rate earned on Stockholders equity = Net income/ Average stockholders equity

Net Income = 110,000

Average Stockholders equity = (250,000+1,200,000+230,000+250,000+1,200,000+160,000)/2 = 1,645,000

Rate earned on Stockholders equity = 110,000/1,645,000 = 6.7%

c) Rate earned on Common Stockholders equity = Net income after pref. dividend/ Avg common stockholders equity

Net Income after preferred dividends = 110,000-25,000 = 85,000

Average Stockholders equity = (1,200,000+230,000+1,200,000+160,000)/2 = 1,395,000

Rate earned on Stockholders equity = 85,000/1,395,000 = 6.1%

d) Earning per share on common stock = Earning for common stock/No. of shares

Earning for common stock = 110,000-25,000 = 85,000

No. of common stock = 1,200,000/$25 = 48,000

EPS = 85,000/48,000 = $1.77 per share of common stock

e) Price Earning ratio on common stock = Market price per share/EPS = $25/$1.77 = 14.1

f) Dividend yield on common stock = Dividend per share/Market price per share

Dividend per share = Annual dividend/No. of shares = 70,000/48,000 = $1.46 per share

Market Price per share = $25

Dividend yield on common stock = $1.46/$25 = 5.8%

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