Question

Analyze Deere & Company

Deere & Company (DE) manufactures and distributes farm and construction machinery that it sells around the world. In addition to its manufacturing operations, Deere’s credit division loans money to customers to finance the purchase of their farm and construction equipment.

The following information is available for three recent years (in millions except per-share amounts):

		Year 3		Year 2		Year 1
Net income (loss)		$1,523.9		$1,940.0		$3,161.7
Preferred dividends		$ 0.00		$ 0.00		$ 0.00
Interest expense		$ 763.7		$ 680.0		$ 664.0
Shares outstanding for computing earnings per share		315		334		363
Cash dividend per share		$ 2.40		$ 2.40		$ 2.22
Average total assets		$ 57,965		$ 59,642		$ 60,429
Average stockholders’ equity		$ 6,644		$ 7,912		$ 9,667
Average stock price per share		$ 92.03		$ 81.10		$ 85.58

1. Calculate the following ratios for each year (Round ratios and percentages to one decimal place, except for per-share amounts. Round per-share amounts to two decimal places.):

			Year 3			Year 2			Year 1
a.	Return on total assets			%			%			%
b.	Return on stockholders' equity			%			%			%
c.	Earnings per share		$			$			$
d.	Dividend yield			%			%			%
e.	Price-earnings ratio

2. Based on these data, which of the following statements is correct?

1. Deere’s profitability, as measured by earnings per share, has improved significantly during the three-year period.
2. The returns on total assets and total stockholders’ equity have also improved significantly during this period.
3. The dividend yield increased significantly in Year 3 due to a large increase in the cash dividend.
4. The price-earnings ratio has improved during this three-year period as the share price has increased at a faster pace than earnings.

Answer 1

Question 1

Return on Asset = Net Income / Average Total Assets * 100

Particulars	Year 3	Year 2	Year 1
Net Income	1,523.90	1,940	3,161.70
÷ Average Total Assets	57,965	59,642	60,429
* 100	100	100	100
Return on Assets in %	2.6%	3.3%	5.2%

Return on Stockholders Equity = Net Income / Average Stockholders Equity * 100

Particulars	Year 3	Year 2	Year 1
Net Income	1,523.90	1,940	3,161.70
÷ Average Stockholders Equity	6,644	7,912	9,667
* 100	100	100	100
Return on Stockholders Equity	22.9%	24.5%	32.7%

Earnings per Share = Net Income attributable to Common Stockholders / Weighted Average Shares

Particulars	Year 3	Year 2	Year 1
Net Income attributable to Common Stockholders	1,523.90	1,940	3,161.70
÷ Weighted Average Outstanding Shares	315	334	363
Earnings per share in $	4.84	5.81	8.71

As Preferred Dividends are $ 0 in all three years then Neet Income will be equal to Net Income attributable to Common Stockholders.

Dividend Yield = Cash Dividend per Share / Average Stock per Share * 100

Particulars	Year 3	Year 2	Year 1
Cash Dividend per Share	2.40	2.40	2.22
÷ Average Stock Price per Share	92.03	81.10	85.58
* 100	100	100	100
Dividend Yield in %	2.6%	2.9%	2.6%

Price Earnings Ratio = Average Stock Price per Share/ Earnings per Share

Particulars	Year 3	Year 2	Year 1
Average Stock Price per Share	92.03	81.10	85.58
÷ Earnings per Share	4.84	5.81	8.71
Price Earnings Ratio	19 Times	13.9 Times	9.8 Times

Question 2

Option 4 is the Correct Answer.

Price Earnings Ratio has improved during the three year period as share price has increased at a faster pace than earnings.