Question

You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

Lydex Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	950,000	$	1,190,000
Marketable securities		0		300,000
Accounts receivable, net		2,660,000		1,760,000
Inventory		3,590,000		2,400,000
Prepaid expenses		260,000		200,000
Total current assets		7,460,000		5,850,000
Plant and equipment, net		9,500,000		9,040,000
Total assets	$	16,960,000	$	14,890,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,000,000	$	2,960,000
Note payable, 10%		3,660,000		3,060,000
Total liabilities		7,660,000		6,020,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,300,000		1,870,000
Total stockholders' equity		9,300,000		8,870,000
Total liabilities and stockholders' equity	$	16,960,000	$	14,890,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,850,000	$	13,480,000
Cost of goods sold		12,680,000		10,110,000
Gross margin		3,170,000		3,370,000
Selling and administrative expenses		1,704,000		1,600,000
Net operating income		1,466,000		1,770,000
Interest expense		366,000		306,000
Net income before taxes		1,100,000		1,464,000
Income taxes (30%)		330,000		439,200
Net income		770,000		1,024,800
Common dividends		340,000		512,400
Net income retained		430,000		512,400
Beginning retained earnings		1,870,000		1,357,600
Ending retained earnings	$	2,300,000	$	1,870,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.4
Acid-test ratio	1.1
Average collection period	40	days
Average sale period	60	days
Return on assets	9.2	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
Price-earnings ratio	10

2. You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $92 per share and that at the end of last year it was $60. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)

a. The earnings per share.

b. The dividend yield ratio.

c. The dividend payout ratio.

d. The price-earnings ratio.

e. The book value per share of common stock.

	This Year Last Year a. The earnings per share b. The dividend yield ratio % % c. The dividend payout ratio % % d. The price-earnings ratio e. The book value per share of common stock

Answer 1

SOLUTION:

PARTICULARS	THIS YEAR	LAST YEAR
a. Earnings per share	$ 7.70	$ 10.25
b. Dividend yield ratio	3.7%	8.5%
c. Dividend payout ratio	44.2%	50.0%
d. Price-earnings ratio	11.95	5.85
e. Book value per share of common stock	$ 93.00	$ 88.70

Calculations:

a.
Earnings per share	Net income / No of common shares outstanding
No of common shares outstanding	Common stock value / Par value of shares
No of common shares outstanding	7000000 / $ 70
No of common shares outstanding	100,000
	This year	Last year
Earnings per share	770000 / 100000	1024800 / 100000
Earnings per share	$ 7.70	$ 10.25

b.
Dividend yield ratio	Dividend / Market price
	This year	Last year
Dividend per share	$ 3.40	$ 5.12
	(340000 / 100000)	(512400 / 100000)
Market price per share	$ 92	$ 60
Dividend yield ratio	3.7%	8.5%

c.
Dividend payout ratio	Dividend / Net income
	This year	Last year
Dividend	340000	512400
Net income	770000	1024800
Dividend payout ratio	44.2%	50.0%

d.
Price-earnings ratio	Market price per share / Earnings per share
	This year	Last year
Market price per share	$ 92	$ 60
Earnings per share	$ 7.70	$ 10.25
Price-earnings ratio	11.95	5.85

e.
Book value per share of common stock	Stockholder's equity / No of shares outstanding
	This year	Last year
Stockholder's equity	$ 9,300,000	$ 8,870,000
No of shares outstanding	100,000	100,000
Book value per share of common stock	$ 93.00	$ 88.70