Question

Redard Corporation Comparative Balance Sheets June 30, 2013 and June 30 2014 Assets 2013 2014 Cash 50,000 164,800 Accounts Receivable 230,000 195,200 Inventory 420,000 320,000 Prepaid Expenses 6,000 5,000 Furniture 144,000 148,000 Accumulated Depr - Furniture (24,000) (42,000) Total Assets 826,000 791,000 Liabilities & Stockholder’s Equity Accounts Payable 200,400 143,400 Income tax payable 7,400 4,400 Notes Payable (Long term) 20,000 40,000 Bond Payable 200,000 100,000 Common Stock $10 par value 200,000 240,000 Additional paid in capital 121,440 181,440 Retained Earnings 76,760 81,760 Total Liabilities & S/E 826,000 791,000 Redard Corporation Income Statement June 30, 2014 Sales 1,609,000 Cost of Goods Sold 1,127,800 Gross Profit 481,200 Operating Expenses 349,400 Operating Income 131,800 Gain on sale of furniture 7,000 Interest expense 23,200 Income before income taxes 115,600 Income tax expense 4,600 Net Income 111,000 Additional information: 1. Paid dividends of $6,000 2. Market price – $75.00

Find the following ratios for 2014:

Debt to Equity Ratio

Number of times interest Earned

Profit Margin

Assets Turnover

Return on Assets

Return on Equity

Earnings per Share

Price/Earnings Ratio

Dividend Yield

Answer 1

Debt to Equity Ratio

Debt to Equity Ratio = Total Liabilities / Total Stockholders Equity

= [Accounts Payable +Income tax payable + Note Payable + Bond Payable] / [Common stock + Additional paid-in capital + Retained Earnings]

= [$143,400 + 4,400 + 40,000 + 100,000] / [$240,000 + 181,440 + 81,760]

= $287,800 / 503,200

= 0.57

Number of times interest Earned

Number of times interest Earned = Earnings Before Interest & Tax / Interest Expenses

= [Net Income + Income Tax + Interest] / Interest Expenses

= [$111,000 + 4,600 + 23,200] / $23,200

= $138,800 / $23,200

= 5.98 Times

Profit Margin

Profit Margin = (Net Income / Sales) x 100

= ($111,000 / $16,09,000) x 100

= 6.90%

Asset Turnover

Asset turnover = Sales / Average Total Assets

= $16,09,000 / [($826,000 + $791,000)/2]

= $16,09,000 / $808,500

= 1.99 Times

Return on Assets

Return on Assets = [Net Income / Average Total Assets ] x 100

= [$111,000 / {($826,000 + $791,000)/2}] x 100

= [$111,000 / 808,500] x 100

= 13.73%

Return on Equity

Total Stockholders Equity June 30, 2013 = $398,200 [$200,000 + 121,440 + 76,760]

Total Stockholders Equity June 30, 2014 = $503,200 [$240,000 + 181,440 + 81,760]

Average Stockholders Equity = $450,700 [($398,200 + $503,200)/2]

Therefore, the Return on Equity = [Net Income / Average Stockholders Equity] x 100

= [$111,000 / $450,700] x 100

= 24.63%

Earnings per share

Number of common shares June 30, 2013 = 20,000 Shares [$200,000 / $10]

Number of common shares June 30, 2014 = 24,000 Shares [$240,000 / $10]

Weighted Average Number of shares = 22,000 Shares [(20,000 + 24,000)/2]

Earnings per share = Net Income / Weighted Average Number of shares

= $111,000 / 22,000 Shares

= $5.05 per share

Price/Earnings Ratio

Price/Earnings Ratio = Market price of the share / Earnings per share

= $75 per share / $5.05 per share

= 14.85 Times

Dividend yield

Dividend yield ratio = Dividend per share / Market price per share

= [$0.25 per share / $75 per share] x 100

= 0.33%

*Dividend per share = Dividend paid / Number of shares outstanding

= $6,000 / 24,000 Shares

= $0.25 per share