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 $ 54 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			$ 3,607,950		$ 3,039,050
Net income			817,600		622,400
Total			$ 4,318,550		$ 3,661,450
Dividends
	On preferred stock		$ 10,500		$ 10,500
	On common stock		43,000		43,000
		Total dividends	$ 53,500		$ 53,500
Retained earnings, December 31			$ 4,372,050		$ 3,607,950

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 4,346,420		$ 4,004,580
Cost of goods sold	1,651,260		1,519,160
Gross profit	$ 2,695,160		$ 2,485,420
Selling expenses	$ 831,020		$ 1,053,320
Administrative expenses	707,900		618,620
Total operating expenses	1,538,920		1,671,940
Income from operations	$ 1,156,240		$ 813,480
Other income	60,860		51,920
	$ 1,217,100		$ 865,400
Other expense (interest)	288,000		158,400
Income before income tax	$ 929,100		$ 707,000
Income tax expense	111,500		84,600
Net income	$ 817,600		$ 622,400

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets
	Cash		$ 891,260		$ 830,590
	Marketable securities		1,348,930		1,376,410
	Accounts receivable (net)		861,400		810,300
	Inventories		642,400		496,400
	Prepaid expenses		168,622		166,120
		Total current assets	$ 3,912,612		$ 3,679,820
Long-term investments			2,175,078		1,083,347
Property, plant, and equipment (net)			4,680,000		4,212,000
Total assets			$ 10,767,690		$ 8,975,167
Liabilities
Current liabilities			$ 1,185,640		$ 1,777,217
Long-term liabilities
	Mortgage note payable, 8 %		$ 1,620,000		$ 0
	Bonds payable, 8 %		1,980,000		1,980,000
		Total long-term liabilities	$ 3,600,000		$ 1,980,000
Total liabilities			$ 4,785,640		$ 3,757,217
Stockholders' Equity
Preferred $ 0.70 stock, $ 50 par			$ 750,000		$ 750,000
Common stock, $ 10 par			860,000		860,000
Retained earnings			4,372,050		3,607,950
	Total stockholders' equity		$ 5,982,050		$ 5,217,950
Total liabilities and stockholders' equity			$ 10,767,690		$ 8,975,167

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.

10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield

Answer 1

10. Times interest earned

Times interest earned = (Net income + Income taxes + Interest expense) ÷ Interest expense

= [ $817600 + 111500 + 288000 ] / 288000

= 12,17,100 / 288,000

= 4.23

11. Asset turnover

Asset turnover = Net Sales / Average total assets

= $ 4,346,420 / [10767690 + 8975167) / 2 ]

= 0.44

12. Return on total assets       

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

= $ 817,600 / [10767690 + 8975167) / 2 ]

= 8.28% or 8% (Rounded)

13. Return on stockholders’ equity

Return on stockholders’ equity = [ Net income / Average Stockholders' Equity ] x 100

= [$ 817,600 / [ (5982050 + 5217950) / 2 ]

= 14.6%

14. Return on common stockholders’ equity

Return on common stockholders’ equity = [ Net Income – Preferred Dividend ] / Average common Stockholders' Equity ] x 100

= [$ 817,600 - $ 10,500 ] / [ (5232050+4467950)/2 ]

= 16.64% or 17% (Rounded)

15. Earnings per share on common stock

Earnings per share on common stock

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

= [$ 817,600 - $ 10,500 ] / 86,000 Shares

= $ 9.38 Per Share

16. Price-earnings ratio

Price-earnings ratio = Market Price / Earnings Per Share

= $54 / $9.38

= 5.76 Times or 6 Times (Rounded)

17. Dividends per share of common stock

Dividends per share of common stock = Common stock dividend / Number of common stock shares

= 43,000     / 86,000 Shares

= $0.50 per share

18. Dividend yield

Dividend yield ratio = [ Dividend per share / Market price per share ] x 100

= [ $0.50 / $54 ] x 100

= 1%