Question

Simon Company’s year-end balance sheets follow. At December 31 Current Yr 1 Yr Ago 2 Yrs Ago Assets Cash $ 31,900 $ 34,900 $ 37,100 Accounts receivable, net 88,300 62,800 55,300 Merchandise inventory 75,102 84,700 54,400 Prepaid expenses 11,546 9,148 4,222 Plant assets, net 383,152 248,452 228,978 Total assets $ 590,000 $ 440,000 $ 380,000 Liabilities and Equity Accounts payable $ 142,503 $ 72,129 $ 49,157 Long-term notes payable secured by mortgages on plant assets 108,702 100,188 86,499 Common stock, $10 par value 162,500 162,500 162,500 Retained earnings 176,295 105,183 81,844 Total liabilities and equity $ 590,000 $ 440,000 $ 380,000 The company’s income statements for the Current Year and 1 Year Ago, follow. For Year Ended December 31 Current Yr 1 Yr Ago Sales $ 767,000 $ 523,600 Cost of goods sold $ 467,870 $ 340,340 Other operating expenses 237,770 132,471 Interest expense 13,039 12,043 Income tax expense 9,971 7,854 Total costs and expenses 728,650 492,708 Net income $ 38,350 $ 30,892 Earnings per share $ 2.36 $ 1.90 Additional information about the company follows. Common stock market price, December 31, Current Year $ 32.00 Common stock market price, December 31, 1 Year Ago 30.00 Annual cash dividends per share in Current Year 0.28 Annual cash dividends per share 1 Year Ago 0.14 For both the Current Year and 1 Year Ago, compute the following ratios: 1. Return on common stockholders' equity. 2. Price-earnings ratio on December 31. 2a. Assuming Simon's competitor has a price-earnings ratio of 7, which company has higher market expectations for future growth? 3. Dividend yield. Next Visit question map Question 15 of 19 Total 15 of 19 Prev

Answer 1

1.

Return on common stockholder equity = Net income - preferred dividend / average common shares

Average common stockholder's equity (Current year) = $(162,500+105,183)+(162,500+176,295) / 2 = $303,239

Average common stockholder's equity (1 year ago) = $(162,500+81,844)+(162,500+105,183) / 2 = $256,013.5

Return on common stockholder equity (Current year) = $38,350 / 303,239 = 12.65%

Return on common stockholder equity (1 year ago) = $30,892 / 256,013.5 = 12.07%

2.

Price earning ratio = Current market price of common stock / earning per share

Earning per share = Net income / Weighted average outstanding common share

Earning per share (Current year) = $38,350 / 16,250 = $2.36

Earning per share (1 year ago) = $30,892 / 16,250 = $1.90

Price earning ratio (Current year) = $32 / $2.36 = 13.56

Price earning ratio (1 year ago) = $30 / $1.90 = 15.79

Simon company has higher market expectation for future growth as its Price earning ratio is more than its competitor.

3.

Dividend yield ratio = Annual cash dividend per share / common stock market price

Dividend yield ratio (Current year) = $0.28 / $32 = 0.875%

Dividend yield ratio (1 year ago) = $0.14 / $30 = 0.467%