Question

Nineteen Measures of Solvency and Profitability

The comparative financial statements of Blige Inc. are as follows. The market price of Blige Inc. common stock was $64 on December 31, 2016.

Blige Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 2016 and 2015
			2016		2015
Retained earnings, January 1			$2,464,650		$2,084,550
Add net income for year			577,600		427,000
Total			$3,042,250		$2,511,550
Deduct dividends
	On preferred stock		$7,000		$7,000
	On common stock		39,900		39,900
		Total	$46,900		$46,900
Retained earnings, December 31			$2,995,350		$2,464,650

Blige Inc.
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
	2016		2015
Sales	$3,738,680		$3,439,600
Sales returns and allowances	18,600		12,090
Sales	$3,720,080		$3,427,510
Cost of goods sold	1,357,800		1,249,180
Gross profit	$2,362,280		$2,178,330
Selling expenses	$799,360		$996,540
Administrative expenses	680,940		585,270
Total operating expenses	1,480,300		1,581,810
Income from operations	$881,980		$596,520
Other income	46,420		38,080
	$928,400		$634,600
Other expense (interest)	272,000		149,600
Income before income tax	$656,400		$485,000
Income tax expense	78,800		58,000
Net income	$577,600		$427,000

Blige Inc.
Comparative Balance Sheet
December 31, 2016 and 2015
			Dec. 31, 2016		Dec. 31, 2015
Assets
Current assets
	Cash		$707,170		$589,200
	Temporary investments		1,070,310		976,380
	Accounts receivable (net)		686,200		642,400
	Inventories		511,000		394,200
	Prepaid expenses		133,787		117,840
		Total current assets	$3,108,467		$2,720,020
Long-term investments			1,688,768		548,174
Property, plant, and equipment (net)			3,740,000		3,366,000
Total assets			$8,537,235		$6,634,194
Liabilities
Current liabilities			$1,071,885		$1,229,544
Long-term liabilities
	Mortgage note payable, 8%, due 2021		$1,530,000		$0
	Bonds payable, 8%, due 2017		1,870,000		1,870,000
		Total long-term liabilities	$3,400,000		$1,870,000
Total liabilities			$4,471,885		$3,099,544
Stockholders' Equity
Preferred $0.7 stock, $50 par			$500,000		$500,000
Common stock, $10 par			570,000		570,000
Retained earnings			2,995,350		2,464,650
	Total stockholders' equity		$4,065,350		$3,534,650
Total liabilities and stockholders' equity			$8,537,235		$6,634,194

Required:

Determine the following measures for 2016, 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.

	$
		days
		days
13. Rate earned on total assets		%
14. Rate earned on stockholders' equity		%
15. Rate earned on common stockholders' equity		%
16. Earnings per share on common stock	$
17. Price-earnings ratio
18. Dividends per share of common stock	$
19. Dividend yield		%

13. Divide the sum of net income plus interest expense by average total assets. Average total assets = (Beginning total assets + Ending total assets) ÷ 2.

14. Divide net income by average total stockholders' equity. Average total stockholders' equity = (Beginning total stockholders' equity + Ending total stockholders' equity) ÷ 2.

15. Divide net income minus preferred dividends from the retained earnings statement by average common stockholders' equity. Common stockholders' equity = Common stock + Retained earnings. Average common stockholders' equity = (Beginning common stockholders' equity + Ending common stockholders' equity) ÷ 2.

16. Divide net income minus preferred dividends from the retained earnings statement by common shares outstanding (common stock ÷ par value).

17. Divide common market share price by common earnings per share (use answer from requirement 16).

18. Divide common dividends (from Retained Earnings Statement) by common shares outstanding (common stock ÷ par value).

19. Divide common dividends per share (use answer from requirement 18) by market share price.

Answer 1

Answer 13.

Average total assets = ($8,537,235 + $6,634,194) / 2
Average total assets = $7,585,714.50

Rate earned on total assets = (Net income + Interest expense) / Average total assets
Rate earned on total assets = ($577,600 + $272,000) / $7,585,714.50
Rate earned on total assets = 11.2%

Answer 14.

Rate earned on stockholders’ equity = ($4,065,350 + $3,534,650) / 2
Rate earned on stockholders’ equity = $3,800,000

Rate earned on stockholders’ equity = Net income / Average stockholders’ equity
Rate earned on stockholders’ equity = $577,600 / $3,800,000
Rate earned on stockholders’ equity = 15.2%

Answer 15.

Average common stockholders’ equity = ($570,000 + $2,995,350 + $570,000 + $2,464,650) / 2
Average common stockholders’ equity = $3,300,000

Rate earned on common stockholders’ equity = Net income / Average common stockholders’ equity
Rate earned on common stockholders’ equity = $577,600 / $3,300,000
Rate earned on common stockholders’ equity = 17.5%

Answer 16.

Earnings per share on common stock = (Net income - Preferred dividends) / Common shares outstanding
Earnings per share on common stock = ($577,600 - $7,000) / 57,000
Earnings per share on common stock = $10.01

Answer 17.

Price-earnings ratio = Common market share price / Earnings per share on common stock
Price-earnings ratio = $64.00 / $10.01
Price-earnings ratio = 6.4

Answer 18.

Dividends per share of common stock = Common dividends / Common shares outstanding
Dividends per share of common stock = $39,900 / 57,000
Dividends per share of common stock = $0.70

Answer 19.

Dividend yield = Dividends per share of common stock / Common market share price
Dividend yield = $0.70 / $64.00
Dividend yield = 1.1%