Question

Imagine you are working for Drexel Morgan Bank, and you are assigned with the task of evaluating Earl Grey, Inc. Consider the following financial information of this company.

Consider the following information about Earl Grey, Inc.

• Total assets $250 million
• Total debt $110 million
• Preferred stock $ 35 million
• Common stockholders' equity $105 million
• Net profits after taxes $25.5 million
• Number of preferred stock outstanding 1.5 million shares
• Number of common stock outstanding 9 million shares
• Preferred dividends paid $2.5 per share
• Common dividends paid $0.70 per share
• Market price of the preferred stock $32.55 per share
• Market price of the common stock $26.00 per share

Use the information above to find the following.

1. The company's book value
2. Its book value per share
3. The stock's earnings per share (EPS)
4. The dividend payout ratio
5. The dividend yield on the common stock
6. The dividend yield on the preferred stock

Directions:

1. You will report the ratios and your analysis in a Word document.
2. Your analysis should include a discussion of the strengths or weaknesses revealed in each ratio.
3. All six ratios should be discussed.

Answer 1

Company's Book Value = Total Assets - Total Liabilities

= $250 million - $110 million

= $140 million.

Company's Book Value Per Share = Total Common Shareholders Equity – Preferred Stock / Number of Outstanding Common Shares.

= $140 million - $35 million / 9 million shares

= $11.66

Stock's Earning Per Share = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding

= [ $25.5 million - ($2.5 per share x 1.5 million shares) ] / 10.5 million shares

= $2.175

Dividend Payout Ratio = Total Dividends / Net Income

= ($2.5 per share x 1.5 million shares + $0.70 per share x 9 million shares) / $25.5 million

= $10.05 million / $25.5 million

= 0.39

Dividend Yield on Common Stock = Dividend Per Share / Market Value Per Share

= ($0.70 / $26) x 100

= 2.70%

Dividend Yield on Preferred Stock = Dividend Per Share / Market Value Per Share

= ($2.50 / $32.55) x 100

= 7.68%