Question

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $82.40 on December 31, 20Y2.

Marshall Inc.

Comparative Retained Earnings Statement

For the Years Ended December 31, 20Y2 and 20Y1

1		20Y2	20Y1
2	Retained earnings, January 1	$3,712,000.00	$3,262,000.00
3	Net income	630,000.00	560,000.00
4	Total	$4,342,000.00	$3,822,000.00
5	Dividends:
6	On preferred stock	$10,000.00	$10,000.00
7	On common stock	100,000.00	100,000.00
8	Total dividends	$110,000.00	$110,000.00
9	Retained earnings, December 31	$4,232,000.00	$3,712,000.00

Marshall Inc.

Comparative Income Statement

For the Years Ended December 31, 20Y2 and 20Y1

1		20Y2	20Y1
2	Sales	$10,860,000.00	$10,000,000.00
3	Cost of goods sold	6,000,000.00	5,440,000.00
4	Gross profit	$4,860,000.00	$4,560,000.00
5	Selling expenses	$2,160,000.00	$2,000,000.00
6	Administrative expenses	1,627,500.00	1,500,000.00
7	Total operating expenses	$3,787,500.00	$3,500,000.00
8	Income from operations	$1,072,500.00	$1,060,000.00
9	Other revenue	99,500.00	20,000.00
10		$1,172,000.00	$1,080,000.00
11	Other expense (interest)	132,000.00	120,000.00
12	Income before income tax	$1,040,000.00	$960,000.00
13	Income tax expense	410,000.00	400,000.00
14	Net income	$630,000.00	$560,000.00

Marshall Inc.

Comparative Balance Sheet

December 31, 20Y2 and 20Y1

1		20Y2	20Y1
2	Assets
3	Current assets:
4	Cash	$1,050,000.00	$950,000.00
5	Marketable securities	301,000.00	420,000.00
6	Accounts receivable (net)	584,000.00	500,000.00
7	Inventories	410,000.00	380,000.00
8	Prepaid expenses	109,000.00	20,000.00
9	Total current assets	$2,454,000.00	$2,270,000.00
10	Long-term investments	800,000.00	800,000.00
11	Property, plant, and equipment (net)	5,770,000.00	5,184,000.00
12	Total assets	$9,024,000.00	$8,254,000.00
13	Liabilities
14	Current liabilities	$842,000.00	$792,000.00
15	Long-term liabilities:
16	Mortgage note payable, 6%,	$200,000.00	$0.00
17	Bonds payable, 4%,	3,000,000.00	3,000,000.00
18	Total long-term liabilities	$3,200,000.00	$3,000,000.00
19	Total liabilities	$4,042,000.00	$3,792,000.00
20	Stockholders’ Equity
21	Preferred 4% stock, $5 par	$250,000.00	$250,000.00
22	Common stock, $5 par	500,000.00	500,000.00
23	Retained earnings	4,232,000.00	3,712,000.00
24	Total stockholders’ equity	$4,982,000.00	$4,462,000.00
25	Total liabilities and stockholders’ equity	$9,024,000.00	$8,254,000.00

10. Times interest earned
11. Asset turnover
12. Return on total assets	%
13. Return on stockholders’ equity	%
14. Return on common stockholders’ equity	%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield	%

Answer 1

10 Times interest earned = Earning before interest and tax / Interest expense

Times interest earned = $1,172,000 / 132,000 = 8.9

11. Asset turnover = Sales / Average total assets

Asset turnover = $10,860,000 / $8,639,000 (8,254,000+9,024,000 / 2)

Asset turnover = 1.26

12. Return on total assets = Net income + Interest expense / Average total assets

Return on total assets = $630,000 + 132,000 / $8,639,000 *100

Return on total assets = 8.82%

13. Return on stockholders equity = Net income / Average stockholder equity

Return on stockholders equity = $630,000 /$4,722,000 (4,462,000+4,982,000 / 2)

Return on stockholders equity = 13.34%

14. Return on common stockholders equity = Net income - Preferred dividend / Average common stockholder equity

Return on common stockholders equity = $630,000 - 10,000 /4,472,000 (4,212,000+4,732,000 / 2) *100

Return on common stockholders equity = 13.86%

15. Earning per share on common stock = Net income - Preferred dividend / Number of common shares outstanding

Earning per share on common stock = $620,000 / 100,000 = $6.2

16. Price earning ratio = Price per share / Earning per share

Price earning ratio = $82.40 / $6.2 = 13.29

17. Dividend per share of common stock = Dividend on common stock / Number of common shares outstanding

Dividend per share of common stock = $100,000 / 100,000 = $1

18. Dividend yield = Dividend per share / Price per share

Dividend yield = $1 / $82.40 *100 = 1.21%