Question

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall Inc. common stock was $ 65 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$ 2,044,700		$ 1,722,200
Net income			460,800		352,700
Total			$ 2,445,100		$ 2,074,900
Dividends
	On preferred stock		$ 7,700		$ 7,700
	On common stock		22,500		22,500
		Total dividends	$ 30,200		$ 30,200
Retained earnings, December 31			$ 2,475,300		$ 2,044,700

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 2,609,750		$ 2,404,520
Cost of goods sold	931,480		856,960
Gross profit	$ 1,678,270		$ 1,547,560
Selling expenses	$ 551,480		$ 682,540
Administrative expenses	469,770		400,850
Total operating expenses	1,021,250		1,083,390
Income from operations	$ 657,020		$ 464,170
Other income	34,580		29,630
	$ 691,600		$ 493,800
Other expense (interest)	168,000		92,800
Income before income tax	$ 523,600		$ 401,000
Income tax expense	62,800		48,300
Net income	$ 460,800		$ 352,700

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 362,380		$ 500,370
	Marketable securities		548,460		829,190
	Accounts receivable (net)		489,100		459,900
	Inventories		365,000		277,400
	Prepaid expenses		68,556		100,070
		Total current assets	$ 1,833,496		$ 2,166,930
Long-term investments			2,004,044		1,039,257
Property, plant, and equipment (net)			2,310,000		2,079,000
Total assets			$ 6,147,540		$ 5,285,187
Liabilities
Current liabilities			$ 632,240		$ 1,140,487
Long-term liabilities
	Mortgage note payable, 8 %		$ 940,000		$ 0
	Bonds payable, 8 %		1,160,000		1,160,000
		Total long-term liabilities	$ 2,100,000		$ 1,160,000
Total liabilities			$ 2,732,240		$ 2,300,487
Stockholders' Equity
Preferred $ 0.70 stock, $ 40 par			$ 440,000		$ 440,000
Common stock, $ 10 par			500,000		500,000
Retained earnings			2,475,300		2,044,700
	Total stockholders' equity		$ 3,415,300		$ 2,984,700
Total liabilities and stockholders' equity			$ 6,147,540		$ 5,285,187

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

11. Asset turnover
12. Return on total assets		%

15. Earnings per share on common stock $ 16. Price-earnings ratio 18. Dividend yield %

Answer 1

11. Asset turnover

Asset turnover = Sales / Average Total Assets

= $ 2,609,750 / [ ($ 6,147,540 + $ 5,285,187) / 2 ]

= $ 2,609,750 / 5716363.5

= 0.5

12. Return on total assets

Return on total assets = [ Net Income / Average Total Assets ] x 100

= [ $ 460,800 / { ($ 6,147,540 + $ 5,285,187) / 2 } x 100

= [ $ 460,800 / 57,16,363.5 ] x 100

= 8.1%

15. Earnings per share on common stock

Earnings per share on common stock

= [ Net Income – Preferred Dividend ] / Number of common stocks shares outstanding

= [ $ 460,800 – 7,700 ] / 50,000 Shares

= $453100 / 50,000 Shares

= $9.1 per share

16. Price-earnings ratio

Price-earnings ratio = Market price of the share / Earnings per share on common stock

= $65 / $9.1

= 7.1 Times or 7 Times(Rounded)

18. Dividend yield

Dividend yield ratio = Dividend per share / Market price per share

= [ $0.45 per share* / $65 per share ] x 100

= 0.7 %

* Dividend per share = $22,500 / 50,000 Shares = $0.45 per share