Question

WILDHORSE COMPANY Balance Sheets December 31
Assets		2017		2016
Cash		$  70,000		$  68,000
Debt investments (short-term)		51,000		40,000
Accounts receivable		109,000		91,000
Inventory		231,000		167,000
Prepaid expenses		27,000		26,000
Land		134,000		134,000
Building and equipment (net)		264,000		186,000
Total assets		$ 886,000		$ 712,000
Liabilities and Stockholders’ Equity
Notes payable		$ 171,000		$ 109,000
Accounts payable		67,000		53,000
Accrued liabilities		41,000		41,000
Bonds payable, due 2017		250,000		170,000
Common stock, $10 par		206,000		206,000
Retained earnings		151,000		133,000
Total liabilities and stockholders’ equity		$ 886,000		$ 712,000

WILDHORSE COMPANY Income Statements For the Years Ended December 31
		2017		2016
Sales revenue		$ 899,000		$ 798,000
Cost of goods sold		650,000		575,000
Gross profit		249,000		223,000
Operating expenses		192,000		168,000
Net income		$  57,000		$  55,000

Additional information:

1.		Inventory at the beginning of 2016 was $ 117,000.
2.		Accounts receivable (net) at the beginning of 2016 were $ 90,000.
3.		Total assets at the beginning of 2016 were $ 634,000.
4.		No common stock transactions occurred during 2016 or 2017.
5.		All sales were on account. Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2017, and (2) as of December 31, 2018, after giving effect to the situation. (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%. If % change is a decrease show the numbers as negative, e.g. -1.83% or (1.83%).) Situation Ratio 1. 18,000 shares of common stock were sold at par on July 1, 2018. Net income for 2018 was $ 54,000. Return on common stockholders’ equity 2. All of the notes payable were paid in 2018. All other liabilities remained at their December 31, 2017 levels. Total assets on December 31, 2018, were $ 908,000. Debt to assets ratio 3. The market price of common stock was $ 9 and $ 12 on December 31, 2017 and 2018, respectively. Price-earnings ratio 2017 2018 % Change 2017 2018 % Change Return on common stockholders’ equity enter percentages % enter percentages % enter percentages % Debt to assets ratio enter percentages % enter percentages % enter percentages % Price earnings ratio enter a price earnings ratio in times times enter a price earnings ratio in times times enter percentages % Total assets for 2018: 908,000.

Answer 1

For 2017

(i)

Average common stockholders’ equity = (Beginning common stockholders' equity + Ending common stockholders' equity)/2

= (206,000 + 133,000 + 206,000 + 151,000)/2

= $348,000

Return on common stockholders’ equity = Net income/Average common stockholders’ equity

= 57,000/348,000

= 16.38%

(ii)

Debt = Notes payable + Accounts payable + Accrued liabilities + Bonds payable

= 171,000 + 67,000 + 41,000 + 250,000

= $529,000

Debt to assets ratio = Debt/Total assets

= 529,000/886,000

= 0.60

(iii)

Earnings per share = Net income/Number of common shares outstanding

= 57,000/20,600

= $2.77

Price earning ratio = Market price of 1 common share/Earnings per share

= 9/2.77

= 3.25

For 2018

(i)

Beginning common stockholders' equity = Common stock + Retained earnings

= 206,000 + 151,000

= $357,000

Ending common stockholders' equity = Common stock, beginning + Retained earnings, beginning + Common stock issued during the year + Net income

= 206,000 + 151,000 + 180,000 + 54,000

= $591,000

Average common stockholders’ equity = (Beginning common stockholders' equity + Ending common stockholders' equity)/2

= ( 357,000 + 591,000)/2

= $474,000

Return on common stockholders’ equity = Net income/Average common stockholders’ equity

= 54,000/474,000

= 11.39%

(ii)

Debt = Notes payable + Accounts payable + Accrued liabilities + Bonds payable

= 171,000 + 67,000 + 41,000

= $279,000

Debt to assets ratio = Debt/Total assets

= 279,000/908,000

= 0.31

(iii)

Weighted number of common shares outstanding = 20,600 + 18,000 x 6/12

= 29,600

Earnings per share = Net income/Number of common shares outstanding

= 54,000/29,600

= $1.82

Price earning ratio = Market price of 1 common share/Earnings per share

= 12/1.82

= 6.59

	2017	2018	% change
Return on common stockholders’ equity	16.38%	11.39%	(11.39 - 16.38)/16.38 = - 30.46
Debt to assets ratio	0.60	0.31	(0.31 - 0.60)/0.60 = - 48.33
Price earnings ratio	3.25	6.59	(6.59 - 3.25)/3.25 = 102.77%

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