Use the information in the table below to calculate the following ratios, and di
ID: 2669185 • Letter: U
Question
Use the information in the table below to calculate the following ratios, and discuss and compare the financial positions of the two firms. NOTE: Please show all calculations (no Excel solutions please) to four decimal places if applicable:
Ratios:
Total Shareholder Return
Return on Sales
Return on Assets
Return on Equity
Asset Turnover
Times Interest Earned
Debt Ratio (You’ll need to calculate the average debt during the year.)
Spaling
Preston
EBIT (Earnings before Interest and Taxes)
300,000
190,000
Interest Expense
10,000
15,000
Net income
200,000
100,000
Dividend payout ratio
35%
40%
Retention ratio
65%
60%
Sales
3,000,000
2,000,000
Average assets during the year
2,500,000
1,500,000
Average shareholders’ equity during the year
1,800,000
1,000,000
Market price per share
Beginning of year
20
18
End of year
15
20
Number of shares outstanding
150,000
50,000
Spaling
Preston
EBIT (Earnings before Interest and Taxes)
300,000
190,000
Interest Expense
10,000
15,000
Net income
200,000
100,000
Dividend payout ratio
35%
40%
Retention ratio
65%
60%
Sales
3,000,000
2,000,000
Average assets during the year
2,500,000
1,500,000
Average shareholders’ equity during the year
1,800,000
1,000,000
Market price per share
Beginning of year
20
18
End of year
15
20
Number of shares outstanding
150,000
50,000
Explanation / Answer
1. Total Shareholder return (TSR) = (Closing share price-beginning share price + dividend per share)/Beginning share price.
Spaling = (15-20+0.4666)/15 = -22.667%
Preston = (20-18+0.80)/20 = 15.555%
2. Return on Sales = Net Income /Sales
Spaling = 200000/3000000 = 6.6667%
Preston = 100000/2000000 = 5%
3. Return on Assets = Net Income / Assets
Spaling = 200000/2500000 = 8%
Preston = 100000/1500000 = 6.6667%
4. Return on Equity = Net Income / Equity
Spaling = 200000/1800000 = 11.11%
Preston = 100000/1000000 = 10%
5. Assets Turnover = Sales / Assets
Spaling = 3000000/2500000 = 1.2 times
Preston = 2000000/1500000 = 1.333 times
6. Times Interest Earned = EBIT / Interest
Spaling = 300000/10000 = 30 times
Preston = 190000/15000 = 12.6667 times
7. Debt Ratio = Total Debt/ Total Assets (In this case debt = Assets - Equity)
Spaling = 700000/2500000 = 0.28
Preston = 500000/1500000 = 0.333
Even though Preston has given better shareholder return, Spaling has better return on sales, assets & equty ratios as comparated to Preston. Spaling Times interest earned ratio is also better than Preston which suggests better debt servicing ability .
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