Question

Exercise 13-11 Profitability analysis LO P3

Simon Company’s year-end balance sheets follow.

At December 31	2017			2016			2015
Assets
Cash	$	31,000		$	34,200		$	37,500
Accounts receivable, net		89,100			62,700			51,600
Merchandise inventory		42,392			83,300			59,500
Prepaid expenses		11,004			9,960			4,192
Plant assets, net		411,504			274,840			217,208
Total assets	$	585,000		$	465,000		$	370,000
Liabilities and Equity
Accounts payable	$	148,578		$	76,227		$	48,352
Long-term notes payable secured by mortgages on plant assets		108,880			105,880			83,405
Common stock, $10 par value		162,500			162,500			162,500
Retained earnings		165,042			120,393			75,743
Total liabilities and equity	$	585,000		$	465,000		$	370,000

The company’s income statements for the years ended December 31, 2017 and 2016, follow.

For Year Ended December 31	2017						2016
Sales				$	760,500					$	553,350
Cost of goods sold	$	463,905					$	359,678
Other operating expenses		235,755						139,998
Interest expense		12,929						12,727
Income taxes		9,887						8,300
Total costs and expenses					722,476						520,703
Net income				$	38,024					$	32,647
Earnings per share				$	2.34					$	2.01

Additional information about the company follows.

Common stock market price, December 31, 2017	$	33.00
Common stock market price, December 31, 2016		31.00
Annual cash dividends per share in 2017		0.32
Annual cash dividends per share in 2016		0.16

To help evaluate the company's profitability, compute the following ratios for 2017 and 2016:

1. Return on common stockholders' equity.
2. Price-earnings ratio on December 31.
3. Dividend yield.

Compute the return on common stockholders' equity for each year.

Require 1

	Return On Common Stockholders’ Equity Choose Numerator: / Choose Denominator: = Return On Common Stockholders’ Equity – / = Return on common stockholders’ equity 2017 – / = % 2016 – / = %

• Required 2

Compute the price-earnings ratio for each year. (Round your answers to 2 decimal places.)

	Price-Earnings Ratio Choose Numerator: / Choose Denominator: = Price-Earnings Ratio / = Price-earnings ratio 2017 / = 2016 / =

Require 3.

Compute the dividend yield for each year. (Round your answers to 2 decimal places.)

	Dividend Yield Choose Numerator: / Choose Denominator: = Dividend Yield / = Dividend yield 2017 / = % 2016 / = %

Answer 1

Common Stockholder's equity
			2017	2016	2015
Common Stock capital	162500	162500	162500
Retained earnings		165042	120393	75743
Common Stockholder's equity	327542	282893	238243
Average Cmmon St. equity:
2017 (327542+282893)/2 =	305217.5
2016 (282893+238243)/2=	260568
Req 1.
Return on Common Stockholder's equity
	Net Income   /	Average Common St. equity =	Return on Common St. equity
2017	38024   /		305217.5   =		12.46%
2016	32647 /		260568 =			12.53%
Req 2.
Price Earnings ratio
	Market price per share   /	Earnings per share =	Price Earnings ratio
2017	33    /			2.34 =		14.1
2016	31    /			2.01 =		15.42
Req 3.
Dividend yield ratio
	Dividend per share /	Market price per share =	Dividend Yield ratio
2017	0.32   /		33 =			0.97%
2016	0.16    /		31 =			0.52%