Problem 13-14B Financial Ratios for Common Stockholders [L013-5, LO13-6 Kris Bui
ID: 2592084 • Letter: P
Question
Problem 13-14B Financial Ratios for Common Stockholders [L013-5, LO13-6 Kris Building Supply sells various building materials to retail outlets. The company has just approached Kingston State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company's financial statements for the most recent two years follow Kris Building Supply Comparative Balance Sheet This Year Last Year Assets Current assets: Cash Marketable securities Accounts receivable, net S 60,500 139,500 16,500 296,000 587,650 27,500 2,500 469,000 946,800 18,500 Prepaid expenses 1,497.300 1,067,150 1,502,555 Total current assets Plant and equipment, net 1,645,410 Total assets S 3,142,895 2,569,798 Liabilitios and Stockholders' Equity Liabilities: Current liabilities Bonds payable, 9% S 820.000 $438,000 622,500 622,500 Total liabilities 1,442,500 1,060,500 Stockholders' equity Preferred stock, $25 par, 7% Common stock, $10 par Retained earnings 282,500 509,000 908,895 282,500 509,000 717,798 Total stockholders' equity 1,700,395 1,509 298 Total liabilitios and slockholder's Equity $ 3,142,895 2,569,798 Kris Building Supply Comparative Income Staternent and Reconcliation This Y S 5,027,000 $ 4,371,000 3,880,000 3.453,000 Cost of goods sold 0 Type here to searchExplanation / Answer
1. ASSESSING THE WELL BEING OF COMMON STOCKHOLDERS:
Working Notes:
(1) Total shares outsatnding = 509,000 / 10 = 50,900
(2) Dividend per share = 96,760 / 50,900 = 1.9 and 71,560 / 50,900 = 1.4
(3) Common shareholder's equity = Common stockholder's + Retained Earnings
2. ASSESSING THE COMPANY'S RATE OF RETURN:
c. Yes, the financial leverage is positive as the return on common stockholder's equity as well as the return on assets is increasing with the same level of debt financing.
RATIOS FORMULA THIS YEAR LAST YEAR a. Earnings per share Net income after preference dividend / No. of shares outstanding 287,857 / 50,900 = $5.65 203,857 / 50,900 = $4 b. Dividends yield ratio Dividend per share / Price per share 1.9 / 43 = 4.4% 1.4 / 38 = 3.6% c. Dividend payout ratio Dividends to common stockholders / Net Income for common stockholders 96,760 / 287,857 = 33% 71,560 / 203,857 = 35% d. Price earnings ratio Price per share / EPS 43 / 5.65 = 7.61 38 / 4 = 9.5 e. Book Value per share Common Shareholder's equity / Common stock outstanding 1,417,895 / 50,900 = $27.85 1,226,798 / 50,900 = $24.10