Question

At December 31	Current Yr			1 Yr Ago			2 Yrs Ago
Assets
Cash	$	31,800		$	34,500		$	36,400
Accounts receivable, net		89,000			63,200			55,300
Merchandise inventory		99,421			84,600			51,500
Prepaid expenses		9,768			10,187			3,410
Plant assets, net		300,011			302,513			163,390
Total assets	$	530,000		$	495,000		$	310,000
Liabilities and Equity
Accounts payable	$	131,970		$	83,655		$	41,329
Long-term notes payable secured by mortgages on plant assets		99,640			112,711			70,565
Common stock, $10 par value		162,500			162,500			162,500
Retained earnings		135,890			136,134			35,606
Total liabilities and equity	$	530,000		$	495,000		$	310,000

The company’s income statements for the Current Year and 1 Year Ago, follow.

For Year Ended December 31	Current Yr						1 Yr Ago
Sales				$	689,000					$	589,050
Cost of goods sold	$	420,290					$	382,883
Other operating expenses		213,590						149,030
Interest expense		11,713						13,548
Income tax expense		8,957						8,836
Total costs and expenses					654,550						554,297
Net income				$	34,450					$	34,753
Earnings per share				$	2.12					$	2.14

Additional information about the company follows.

Common stock market price, December 31, Current Year	$	28.00
Common stock market price, December 31, 1 Year Ago		26.00
Annual cash dividends per share in Current Year		0.30
Annual cash dividends per share 1 Year Ago		0.15

For both the Current Year and 1 Year Ago, compute the following ratios:

1. Return on common stockholders' equity.
2. Price-earnings ratio on December 31.
2a. Assuming Simon's competitor has a price-earnings ratio of 7, which company has higher market expectations for future growth?
3. Dividend yield.

Answer 1

(1)

Return on common stockholders equity = net income/average common stockholders equity

Common stockholders equity = common stock + retained earnings

therefore,

for current year,

Return on common stockholders equity = $34450/[{($162500 + $135890) + ($162500 + $136134)}/2]

= $34450/$298512

= 11.54%

for last year,

Return on common stockholders equity = $34753/[{($162500 + $136134) + ($162500 + $35606)}/2]

= $34753/$248370

= 13.99%

(2)

price earning ratio = market price/earning per share

for current year,

price earning ratio = $28/$2.12

= 13.21 times

for last year,

price earning ratio = $26/$2.14

= 12.15 times

(2a)

Simon company has higher market expectations for growth as it has higher price earning ratio. Higher price earning ratio means a investors are expecting high growth rate in future.

(3)

dividend yield = dividend per share/marker price

for current year,

dividend yield = $0.30/$28

= 1.07%

for last year,

dividend yield = $0.15/$26

= 0.58%