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 $ 880,000 $ 1,120,000 Marketable securities 0 300,000 Accounts receivable, net 2,380,000 1,480,000 Inventory 3,520,000 2,200,000 Prepaid expenses 240,000 180,000 Total current assets 7,020,000 5,280,000 Plant and equipment, net 9,360,000 8,970,000 Total assets $ 16,380,000 $ 14,250,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,930,000 $ 2,820,000 Note payable, 10% 3,620,000 3,020,000 Total liabilities 7,550,000 5,840,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 1,330,000 910,000 Total stockholders' equity 8,830,000 8,410,000 Total liabilities and stockholders' equity $ 16,380,000 $ 14,250,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,780,000 $ 12,780,000 Cost of goods sold 12,624,000 9,585,000 Gross margin 3,156,000 3,195,000 Selling and administrative expenses 1,794,000 1,572,000 Net operating income 1,362,000 1,623,000 Interest expense 362,000 302,000 Net income before taxes 1,000,000 1,321,000 Income taxes (30%) 300,000 396,300 Net income 700,000 924,700 Common dividends 280,000 462,350 Net income retained 420,000 462,350 Beginning retained earnings 910,000 447,650 Ending retained earnings $ 1,330,000 $ 910,000 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 1.0 Average collection period 30 days Average sale period 60 days Return on assets 8.4 % Debt-to-equity ratio 0.7 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 $78 per share and that at the end of last year it was $46. 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.

Answer 1

This Year:

Number of shares outstanding = Value of Equity / Par Value per share
Number of shares outstanding = $7,500,000 / $75
Number of shares outstanding = 100,000

Earnings per Share = Net Income / Number of shares outstanding
Earnings per share = $700,000 / 100,000
Earnings per share = $7.00

Dividend per share = Dividend / Number of shares outstanding
Dividend per share = $280,000 / 100,000
Dividend per share = $2.80

Dividend Yield Ratio = Dividend per share / Market Price per share
Dividend Yield Ratio = $2.80 / $78
Dividend Yield Ratio = 3.6%

Dividend Payout Ratio = Dividend / Net Income
Dividend Payout Ratio = $280,000 / $700,000
Dividend Payout Ratio = 40%

Price-Earnings Ratio = Market Price per share / Earnings per share
Price-Earnings Ratio = $78 / $7.0
Price-Earnings Ratio = 11.1

Book Value per share = Stockholders’ Equity / Number of shares outstanding
Book Value per share = $8,830,000 / 100,000
Book Value per share = $88.30

Last Year:

Number of shares outstanding = Value of Equity / Par Value per share
Number of shares outstanding = $7,500,000 / $75
Number of shares outstanding = 100,000

Earnings per Share = Net Income / Number of shares outstanding
Earnings per share = $924,700 / 100,000
Earnings per Share = $9.25

Dividend per share = Dividend / Number of shares outstanding
Dividend per share = $462,350 / 100,000
Dividend per share = $4.6235

Dividend Yield Ratio = Dividend per share / Market Price per share
Dividend Yield Ratio = $4.6235 / $46
Dividend Yield Ratio = 10.1%

Dividend Payout Ratio = Dividend / Net Income
Dividend Payout Ratio = $462,350 / $924,700
Dividend Payout Ratio = 50%

Price-Earnings Ratio = Market Price per share / Earnings per share
Price-Earnings Ratio = $46 / $9.25
Price-Earnings Ratio = 5.0

Book Value per share = Stockholders’ Equity / Number of shares outstanding
Book Value per share = $8,410,000 / 100,000
Book Value per share = $84.10