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	$	960,000	$	1,260,000
Marketable securities		0		300,000
Accounts receivable, net		2,700,000		1,800,000
Inventory		3,900,000		2,400,000
Prepaid expenses		240,000		180,000
Total current assets		7,800,000		5,940,000
Plant and equipment, net		9,300,000		8,940,000
Total assets	$	17,100,000	$	14,880,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,900,000	$	2,760,000
Note payable, 10%		3,600,000		3,000,000
Total liabilities		7,500,000		5,760,000
Stockholders' equity:
Common stock, $78 par value		7,800,000		7,800,000
Retained earnings		1,800,000		1,320,000
Total stockholders' equity		9,600,000		9,120,000
Total liabilities and stockholders' equity	$	17,100,000	$	14,880,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,750,000	$	12,480,000
Cost of goods sold		12,600,000		9,900,000
Gross margin		3,150,000		2,580,000
Selling and administrative expenses		1,590,000		1,560,000
Net operating income		1,560,000		1,020,000
Interest expense		360,000		300,000
Net income before taxes		1,200,000		720,000
Income taxes (30%)		360,000		216,000
Net income		840,000		504,000
Common dividends		360,000		252,000
Net income retained		480,000		252,000
Beginning retained earnings		1,320,000		1,068,000
Ending retained earnings	$	1,800,000	$	1,320,000

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

Current ratio	2.3
Acid-test ratio	1.2
Average collection period	30	days
Average sale period	60	days
Return on assets	9.5	%
Debt-to-equity ratio	0.65
Times interest earned ratio	5.7
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 $72 per share and that at the end of last year it was $40. 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	$?		$?

2 decimal places required.

Answer 1

2
a.	Earnings per share=Net income/Number of common shares
	Number of common shares=Common stock/Par value=7800000/78=100000 shares
					This Year	Last Year
	Net income				840000	504000
	Number of common shares				100000	100000
	Earnings per share				8.4	5.04
b.	Dividend yield ratio=Dividend per share/Price per share
	Dividend per share=Dividend/Number of common shares
					This Year	Last Year
	Common dividend				360000	252000
	Number of common shares				100000	100000
	Dividend per share				3.6	2.52
	Price per share				72	40
	Dividend yield ratio				5.00%	6.30%
c.	Dividend payout ratio=Dividend per share/Earnings per share
					This Year	Last Year
	Dividend per share				3.6	2.52
	Earnings per share				8.4	5.04
	Dividend payout ratio				42.86%	50.00%
d.	Price-earnings ratio=Price per share/Earnings per share
					This Year	Last Year
	Price per share				72	40
	Earnings per share				8.4	5.04
	Price-earning ratio				8.57	7.94
e.	Book value per share of common stock=Total stockholder's equity-preferred equity/Number of common shares
	Here, preferred equity=0.
					This Year	Last Year
	Total stockholder's equity				9600000	9120000
	Number of common shares				100000	100000
	Book value per share				96	91.2