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Pinnacle Plus declared and paid a cash dividend of $8,400 in the current year. Its comparative...

Pinnacle Plus declared and paid a cash dividend of $8,400 in the current year. Its comparative financial statements, prepared at December 31, reported the following summarized information:

Current Year Previous Year
Income Statement
Sales Revenue $ 200,000 $ 171,000
Cost of Goods Sold 88,000 84,000
Gross Profit 112,000 87,000
Operating Expenses 54,000 47,400
Interest Expense 5,800 5,800
Income before Income Tax Expense 52,200 33,800
Income Tax Expense (30%) 15,660 10,140
Net Income $ 36,540 $ 23,660
Balance Sheet
Cash $ 92,990 $ 20,000
Accounts Receivable, Net 35,000 30,000
Inventory 43,000 56,000
Property and Equipment, Net 113,000 123,000
Total Assets $ 283,990 $ 229,000
Accounts Payable $ 60,000 $ 33,200
Income Tax Payable 1,450 1,400
Note Payable (long-term) 58,000 58,000
Total Liabilities 119,450 92,600
Common Stock (par $10) 100,800 100,800
Retained Earnings 63,740 35,600
Total Liabilities and Stockholders’ Equity $ 283,990 $ 229,000

Required:

  1. Compute the gross profit percentage in the current and previous years. Are the current year results better, or worse, than those for the previous year?
  2. Compute the net profit margin for the current and previous years. Are the current year results better, or worse, than those for the previous year?
  3. Compute the earnings per share for the current and previous years. Are the current year results better, or worse, than those for the previous year?
  4. Stockholders’ equity totaled $118,000 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
  5. Net property and equipment totaled $128,000 at the beginning of the previous year. Compute the fixed asset turnover ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
  6. Compute the debt-to-assets ratios for the current and previous years. Is debt providing financing for a larger or smaller proportion of the company’s asset growth?
  7. Compute the times interest earned ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
  8. After Pinnacle Plus released its current year’s financial statements, the company’s stock was trading at $36. After the release of its previous year’s financial statements, the company’s stock price was $33 per share. Compute the P/E ratios for both years. Does it appear that investors have become more (or less) optimistic about Pinnacle’s future success?

Solutions

Expert Solution

Current Year Previous Year
1 GP Margin GP / Sales revenue 112,000 / 200,000 56.00% 87,000 / 171,000 50.88% Results were BETTER
2 NP Margin Net Income / sales revenue 36,540 / 200,000 18.27% 23,660 / 171,000 13.84% Results were BETTER
3 EPS Net Income / Number of shares 36,540 / 10,080          3.63 23,660 / 10,080          2.35 Results were BETTER
4 ROE Net Income / Average equity 36,540 / (164,540 + 136,400)/2 24.28% 23,660 / (136,400 + 118,000)/2 18.60% Results were BETTER
5 Fixed asset turnover Sales revenue / Average fixed assets 200,000 / (113,000 + 123,000)/2 1.69 171,000 / (128,000 + 123,000)/2 1.36 Results were BETTER
6 Debt to asset ratio Total Liabilities / Total assets 119,450 / 283,990          0.42 92,600 / 229,000          0.40 LARGER
7 Times interest earned Income before interest and tax / Interest (52,200 + 5,800) / 5,800        10.00 (33,800 + 5,800) / 5,800          6.83 BETTER
8 PE ratio MPS / EPS 36 / 3.63          9.93 33 / 2.35        14.04 LESS OPTIMISTIC

ekkarill92 answered 7 months ago
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