Question

In: Accounting

                                         Company X

  1.                                          Company XYZ

                                                       Balance Sheet

                     Assets                                                           Liabilities

   Cash                                 $15,000           Accounts Payable                               $20,000

   Marketable Securities        25,000           Accrued Wages                                    17,000

   Accounts Receivable         30,000           Bonds                                                    15,000

   Inventory                           35,000           Bank Loan                                             50,000

   Net Plant & Equipment $125,000            Total Liabilities                               $102,000

                                                                                       Owners Equity

                                                                     

                                                                 Common Stock                                        $85,000

                                                                 Retained Earnings                                      43,000

                                                                      Total Owners Equity                         $128,000

    Total Assets               $230,000           Total Liabilities & Owners Equity         $230,000

Sales during the year were $550,000.

Net Income for the year was $40,000.

Market Price per share is currently $20.00.

Interest expense for the year was $7,000.

Earnings before taxes were $50,000.

20,000 shares of Common Stock Outstanding

Based on the above information calculate and interpret the following ratios: (40 points)

  1. Profit Margin
  2. ROA
  3. ROE
  4. Price/Earnings Ratio
  5. Market to Book Value

Solutions

Expert Solution

1) Profit margin = [net income / net sales ] X 100%

Profit margin = [ $ 40,000 / $ 550,000] X 100%

Profit margin = 7.27 %

2) ROA =[ net income / average total assets]X100%

ROA = [$ 40,000/ $ 230,000] X 100%

ROA = 17.39%

Note: Here, total assets is considered as average total assets ,because previous year total assets was not mentioned in the question.

3) ROE = [ net income / shareholder's equity ]X100%

ROE = [ $ 40,000 / $ 128,000] X 100%

ROE = 31.25%

4) Price / earning ratio = [market price per share /earning per share ]

Market price per share = $ 20.00

Earning per share = net income / number of common stock outstanding

Earning per share = [ $ 40,000 / 20,000] = $ 2

Price earning ratio = $ 20/ $ 2 = 10.00

5) Market to book value = [ Market price per share / Book value per share ]

Book value per share = Total book value of shares / number of common stock outstanding

Book value per share = [ $ 85,000 / 20,000] = $ 4.25

Market to book value = $ 20.00

Market to Book value = $ 20.00 / $ 4.25 = 4.71

ekkarill92 answered 2 years ago
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