Chapter 3 (2)
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Chapter 3 (2)

Course Number: ACCT 416, Winter 2010

College/University: USC

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. award: 1 out of 1 point Crabtree, Inc., had additions to retained earnings for the year just ended of $626,000. The firm paid out $125,000 in cash dividends, and it has ending total equity of $7.21 million. Requirement 1: If the company currently has 580,000 shares of common stock outstanding, what are earnings per share, dividends per share and book value per share?(Do not include the dollar signs ($). Round...

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out . award: 1 of 1 point Crabtree, Inc., had additions to retained earnings for the year just ended of $626,000. The firm paid out $125,000 in cash dividends, and it has ending total equity of $7.21 million. Requirement 1: If the company currently has 580,000 shares of common stock outstanding, what are earnings per share, dividends per share and book value per share?(Do not include the dollar signs ($). Round your answers to 2 decimal places (e.g., 32.16).) Earnings per share Dividends per share Book value per share $ 1.29 $ 0.22 $ 12.43 Requirement 2: If the stock currently sells for $29.10 per share, what is the market-to-book ratio and the price-earnings ratio? (Round your answers to 2 decimal places (e.g., 32.16).) Market-to-book ratio Price-earnings ratio 2.34 22.55 times times Requirement 3: If total sales were $10.51 million, what is the price-sales ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-sales ratio 1.61 times eBook Link Worksheet Difficulty: Basic Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios. Crabtree, Inc., had additions to retained earnings for the year just ended of $626,000. The firm paid out $125,000 in cash dividends, and it has ending total equity of $7.21 million. Requirement 1: If the company currently has 580,000 shares of common stock outstanding, what are earnings per share, dividends per share and book value per share?(Do not include the dollar signs ($). Round your answers to 2 decimal places (e.g., 32.16).) Earnings per share Dividends per share Book value per share $ $ $ Requirement 2: If the stock currently sells for $29.10 per share, what is the market-to-book ratio and the price-earnings ratio? (Round your answers to 2 decimal places (e.g., 32.16).) Market-to-book ratio Price-earnings ratio times times Requirement 3: If total sales were $10.51 million, what is the price-sales ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-sales ratio times Explanation: 1. We need to calculate the net income before we calculate the earnings per share. The sum of dividends and addition to retained earnings must equal net income, so net income must have been: Net income = Addition to retained earnings + Dividends Net income = $626,000 + $125,000 Net income = $751,000 So, the earnings per share were: EPS = Net income / Shares outstanding EPS = $751,000 / 580,000 EPS = $1.29 per share The dividends per share were: Dividends per share Dividends per share Dividends per share = Total dividends / Shares outstanding = $125,000 / 580,000 = $0.22 per share The book value per share was: Book value per share Book value per share Book value per share 2. = Total equity / Shares outstanding = $7,210,000 / 580,000 = $12.43 per share The market-to-book ratio is: Market-to-book ratio = Share price / Book value per share Market-to-book ratio = $29.10 / $12.43 Market-to-book ratio = 2.34 times The P/E ratio is: P/E ratio = Share price / EPS P/E ratio = $29.10 / $1.29 P/E ratio = 22.47 times 3. Sales per share are: Sales per share Sales per share Sales per share = Total sales / Shares outstanding = $10,510,000 / 580,000 = $18.12 The P/S ratio is: P/S ratio = Share price / Sales per share P/S ratio = $29.10 / $18.12 P/S ratio = 1.61 times 2. award: 1 out of 1 point Rainbow Company has a debt-equity ratio of 1.29. Return on assets is 7.54 percent, and total equity is $645,000. Requirement 1: What is the equity multiplier? (Round your answer to 2 decimal places (e.g., 32.16).) Equity multiplier 2.29 Requirement 2: What is the return on equity? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Return on equity 17.27 % Requirement 3: What is the net income? (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount (e.g., 32).) Net income $ 111,370 eBook Link Worksheet Difficulty: Basic Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios. Rainbow Company has a debt-equity ratio of 1.29. Return on assets is 7.54 percent, and total equity is $645,000. Requirement 1: What is the equity multiplier? (Round your answer to 2 decimal places (e.g., 32.16).) Equity multiplier Requirement 2: What is the return on equity? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Return on equity % Requirement 3: What is the net income? (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount (e.g., 32).) Net income $ Explanation: With the information provided, we need to calculate the return on equity using an extended return on equity equation. We first need to find the equity multiplier which is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier = 1 + 1.29 Equity multiplier = 2.29 Now we can calculate the return on equity as: ROE ROE ROE = (ROA)(Equity multiplier) = 0.0754(2.29) = 0.1727 or 17.27% The return on equity equation we used was an abbreviated version of the Du Pont identity. If we multiply the profit margin and total asset turnover ratios from the Du Pont identity, we get: (Net income / Sales)(Sales / Total assets) = Net income / Total assets = ROA With the return on equity, we can calculate the net income as: ROE = Net income / Total equity 0.1727 = Net income / $645,000 Net income = $111,370 3. award: 1 out of 1 point The most recent financial statements for Shinoda Manufacturing Co. are shown below: Sales Income Statement $ 64,000 Current Balance Sheet $ 27,000 Debt $ 43,200 Costs Taxable income Tax (35%) Net Income assets Fixed 44,780 assets $ 19,220 Total 79,900 $ 106,900 Equity Total 63,700 $ 106,900 6,727 $ 12,493 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 41 percent dividend payout ratio. No external financing is possible. Required: What is the internal growth rate? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Internal growth rate 7.41 % eBook Link Worksheet Difficulty: Basic Learning Objective: 03-03 Assess the determinants of a firms profitability and growth. The most recent financial statements for Shinoda Manufacturing Co. are shown below: Income Statement Sales Costs Taxable income Current $ 64,000 assets Fixed 44,780 assets $ 19,220 Total Balance Sheet $ 27,000 79,900 $ 106,900 Debt Equity Total $ 43,200 63,700 $ 106,900 Tax (35%) Net Income 6,727 $ 12,493 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 41 percent dividend payout ratio. No external financing is possible. Required: What is the internal growth rate? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Internal growth rate % Explanation: To calculate the internal growth rate, we need to find the ROA and the plowback ratio. The ROA for the company is: ROA = Net income / Total assets ROA = $12,493 / $106,900 ROA = 0.1169 or 11.69% And the plowback ratio is: b = 1 0.41 b = 0.59 Now, we can use the internal growth rate equation to find: Internal growth rate Internal growth rate Internal growth rate = [(ROA)(b)] / [1 (ROA)(b)] = [0.1169(0.59)] / [1 0.1169(0.59)] = 0.0741 or 7.41% 4. award: 1 out of 1 point The most recent financial statements for Shinoda Manufacturing Co. are shown below: Income Statement Sales Costs Taxable income Tax (40%) Net Income $ $ $ Current 64,300 assets Fixed 44,630 assets 19,670 Total $ Balance Sheet 28,500 Debt 81,400 Equity $ 109,900 Total $ 44,700 65,200 $ 109,900 7,868 11,802 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 44 percent dividend payout ratio. No external financing is possible. Required: What is the sustainable growth rate? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Sustainable growth rate 11.28 % eBook Link Worksheet Difficulty: Basic Learning Objective: 03-03 Assess the determinants of a firms profitability and growth. The most recent financial statements for Shinoda Manufacturing Co. are shown below: Income Statement Sales Costs Taxable income Tax (40%) Net Income $ $ $ Current 64,300 assets Fixed 44,630 assets 19,670 Total $ Balance Sheet 28,500 Debt 81,400 Equity $ 109,900 Total $ 44,700 65,200 $ 109,900 7,868 11,802 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 44 percent dividend payout ratio. No external financing is possible. Required: What is the sustainable growth rate? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Sustainable growth rate % Explanation: To calculate the sustainable growth rate, we need to find the ROE and the plowback ratio. The ROE for the company is: ROE = Net income / Equity ROE = $11,802 / $65,200 ROE = 0.1810 or 18.10% The computation of the plowback ratio: b = 1 0.44 b = 0.56 The sustainable growth rate is: Sustainable growth rate Sustainable growth rate Sustainable growth rate = [(ROE)(b)] / [1 (ROE)(b)] = [(0.1810)(0.56)] / [1 (0.1810)(0.56)] = 0.1128 or 11.28% 5. award: 1 out of 1 point Young Trucking, Inc., has a current stock price of $44.00. For the past year, the company had net income of $7,000,000, total equity of $21,730,000, sales of $40,500,000, and 5.6 million shares of stock outstanding. Requirement 1: What are earnings per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Earnings per share $ 1.25 Requirement 2: What is the price-earnings ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-earnings ratio 35.00 Requirement 3: What is the price-sales ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-sales ratio 6.08 Requirement 4: What is the book value per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Book value per share $ 3.88 Requirement 5: What is the market-to-book ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Market-to-book ratio 11.34 eBook Link Worksheet Difficulty: Basic Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios. Young Trucking, Inc., has a current stock price of $44.00. For the past year, the company had net income of $7,000,000, total equity of $21,730,000, sales of $40,500,000, and 5.6 million shares of stock outstanding. Requirement 1: What are earnings per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Earnings per share $ Requirement 2: What is the price-earnings ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-earnings ratio Requirement 3: What is the price-sales ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-sales ratio Requirement 4: What is the book value per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Book value per share $ Requirement 5: What is the market-to-book ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Market-to-book ratio Explanation: 1.The earnings per share are: EP = Net income / Shares S EP = $7,000,000 / 5,600,000 S EP = $1.25 S 2.The price-earnings ratio is: P/E = Price / EPS P/E = $44.00 / $1.25 P/E = 35.20 3.The sales per share are: Sales per share = Sales / Shares Sales per share = $40,500,000 / 5,600,000 Sales per share = $7.23 The price-sales ratio is: P/S = Price / Sales per share P/S = $44.00 / $7.23 P/S = 6.08 4.The book value per share is: Book value per share = Book value of equity / Shares Book value per share = $21,730,000 / 5,600,000 Book value per share = $3.88 per share 5.The market-to-book ratio is: Market-to-book = Market value per share / Book value per share Market-to-book = $44.00 / $3.88 Market-to-book = 11.34 6. award: 0 out of 1 point The Rose Company has net income of $157,850. There are currently 28.65 days sales in receivables. Total assets are $846,000, total receivables are $147,100, and the debt-equity ratio is 0.35. Requirement 1: What is the companys profit margin? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Profit margin 1.07 % Requirement 2: What is the companys total asset turnover? (Round your answer to 2 decimal places (e.g., 32.16).) Total asset turnover .19 times Requirement 3: What is the companys ROE? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) ROE 2.21 % eBook Link Worksheet Difficulty: Intermediate Learning Objective: 03-03 Assess the determinants of a firms profitability and growth. The Rose Company has net income of $157,850. There are currently 28.65 days sales in receivables. Total assets are $846,000, total receivables are $147,100, and the debt-equity ratio is 0.35. Requirement 1: What is the companys profit margin? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Profit margin % Requirement 2: What is the companys total asset turnover? (Round your answer to 2 decimal places (e.g., 32.16).) Total asset turnover times Requirement 3: What is the companys ROE? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) ROE % Explanation: 1: To calculate the profit margin, we first need to calculate the sales. Using the days sales in receivables, we find the receivables turnover is: Days sales in receivables 28.65 days Receivables turnover = 365 days / Receivables turnover = 365 days / Receivables turnover = 12.74 times Now, we can use the receivables turnover to calculate the sales as: Receivables turnover 12.74 Sales = Sales / Receivables = Sales / $147,100 = $1,874,048.866 So, the profit margin is: Profit margin = Net income / Sales Profit margin = $157,850 / $1,874,048.866 Profit margin = 0.0842 or 8.42% 2: The total asset turnover is: Total asset turnover Total asset turnover Total asset turnover 3: = Sales / Total assets = $1,874,048.866 / $846,000 = 2.22 times We need to use the Du Pont identity to calculate the return on equity. Using this relationship, we get: ROE = (Profit margin)(Total asset turnover)(1 + Debt-equity ratio) ROE = (0.0842)(2.22)(1 + 0.35) ROE = 0.2519 or 25.19% 7. award: 1 out of 1 point Some recent financial statements for Smolira Golf, Inc., follow. 2009 Current assets Cash Account s receivable Inventor y Total $ $ 2010 3,031 4,737 12,598 20,366 SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2009 and 2010 2009 2010 Assets Liabilities and Owners Equity Current liabilities Accounts $ 3,007 $ 2,183 $ 2,660 payable Notes 5,721 1,780 2,176 payable 13,722 $ 22,450 Other Total Long-term debt Owners equity Common stock and paid-in surplus Accumul ated retained earnings $ $ 96 4,059 $ 13,900 $ 113 4,949 16,660 $ 41,000 $ 41,000 Fixed assets Net plant and equipment 15,684 39,550 54,277 79,709 Total Total liabilities and owners equity $ 56,684 $ 80,550 Total assets $ 74,643 $ 102,159 $ 74,643 $ 102,159 Sales Cost of goods sold Depreciatio n SMOLIRA GOLF, INC. 2010 Income Statement $ 188,570 126,803 5,273 EBIT Interest paid Taxable income Taxes Net income Dividends Retained earnings $ 56,494 1,370 55,124 19,293 $ $ $ 35,831 11,965 23,866 Required: Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate): (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) 2009 Short-term solvency ratios a. Current ratio b. Quick ratio c. Cash ratio Asset utilization ratios d. Total asset turnover e. Inventory turnover f. Receivables turnover Long-term solvency ratios g. Total debt ratio h. Debt-equity ratio i. Equity multiplier j. Times interest earned ratio k. Cash coverage ratio 0.24 0.32 1.32 5.02 1.91 0.75 times times times 2010 4.54 1.76 0.60 times times times 1.85 9.24 32.96 times times times 0.21 0.27 1.27 41.24 45.08 times times Profitability ratios l. Profit margin m. Return on assets n. Return on equity 19.00 35.00 44.48 % % % eBook Link Worksheet Difficulty: Intermediate Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios. Some recent financial statements for Smolira Golf, Inc., follow. 2009 Current assets Cash Account s receivable Inventor y Total $ $ 2010 3,031 4,737 12,598 20,366 SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2009 and 2010 2009 2010 Assets Liabilities and Owners Equity Current liabilities Accounts $ 3,007 $ 2,183 $ 2,660 payable Notes 5,721 1,780 2,176 payable 13,722 $ 22,450 Other Total Long-term debt Owners equity Common stock and paid-in surplus Accumul ated retained earnings $ $ 96 4,059 13,900 $ $ 113 4,949 16,660 $ 41,000 $ 41,000 Fixed assets Net 54,277 79,709 15,684 39,550 Total $ 56,684 $ 80,550 plant and equipment Total liabilities and owners equity Total assets $ 74,643 $ 102,159 $ 74,643 $ 102,159 Sales Cost of goods sold Depreciatio n SMOLIRA GOLF, INC. 2010 Income Statement $ 188,570 126,803 5,273 EBIT Interest paid Taxable income Taxes Net income Dividends Retained earnings $ 56,494 1,370 55,124 19,293 $ $ $ 35,831 11,965 23,866 Required: Find the following financial ratios for Smolira Golf (use year-end figures rather than average values where appropriate): (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) 2009 Short-term solvency ratios a. Current ratio b. Quick ratio c. Cash ratio Asset utilization ratios times times times 2010 ti me s ti me s ti me s d. Total asset turnover e. Inventory turnover f. Receivables turnover Long-term solvency ratios g. Total debt ratio h. Debt-equity ratio i. Equity multiplier j. Times interest earned ratio k. Cash coverage ratio Profitability ratios l. Profit margin m. Return on assets n. Return on equity ti me s ti me s ti me s ti me s ti me s % % % Explanation: Here, we need to calculate several ratios given the financial statements. The ratios are: Short-term solvency ratios: a. Current ratio = Current assets / Current liabilities Current ratio2009 = $20,366 / $4,059 Current ratio2009 = 5.02 times Current ratio2010 = $22,450 / $4,949 Current ratio2010 = 4.54 times b. Quick ratio = (Current assets Inventory) / Current liabilities Quick ratio2009 = ($20,366 12,598) / $4,059 Quick ratio2009 = 1.91 times Quick ratio2010 = ($22,450 13,722) / $4,949 Quick ratio2010 = 1.76 times c. Cash ratio = Cash / Current liabilities Cash ratio2009 = $3,031 / $4,059 Cash ratio2009 = 0.75 times Cash ratio2010 = $3,007 / $4,949 Cash ratio2010 = 0.61 times Asset utilization ratios: d. Total asset turnover = Sales / Total assets Total asset turnover = $188,570 / $102,159 Total asset turnover = 1.85 times e. Inventory turnover = COGS / Inventory Inventory turnover = $126,803 / $13,722 Inventory turnover = 9.24 times f. Receivables turnover = Sales / Receivables Receivables turnover = $188,570 / $5,721 Receivables turnover = 32.96 times Long-term solvency ratios: g. Total debt ratio = (Current liabilities + Long-term debt) / Total assets Total debt ratio2009 = ($4,059 + 13,900) / $74,643 Total debt ratio2009 = 0.24 Total debt ratio2010 = ($4,949 + 16,660) / $102,159 Total debt ratio2010 = 0.21 h. Debt-equity ratio = (Current liabilities + Long-term debt) / Total equity Debt-equity ratio2009 = ($4,059 + 13,900) / $56,684 Debt-equity ratio2009 = 0.32 Debt-equity ratio2010 = ($4,949 + 16,660) / $80,550 Debt-equity ratio2010 = 0.27 i. Equity multiplier = 1 + D/E ratio Equity multiplier2009 = 1 + 0.32 Equity multiplier2009 = 1.32 Equity multiplier2010 = 1 + 0.27 Equity multiplier2010 = 1.27 j. Times interest earned = EBIT / Interest Times interest earned = $56,494 / $1,370 Times interest earned = 41.24 times k. Cash coverage ratio = (EBIT + Depreciation) / Interest Cash coverage ratio = ($56,494 + 5,273) / $1,370 Cash coverage ratio = 45.09 times Profitability ratios: l. Profit margin = Net income / Sales Profit margin = $35,831 / $188,570 Profit margin = 0.1900 or 19.00% m. Return on assets = Net income / Total assets Return on assets = $35,831 / $102,159 Return on assets = 0.3507 or 35.07% n. Return on equity = Net income / Total equity Return on equity = $35,831 / $80,550 Return on equity = 0.4448 or 44.48% 8. award: 1 out of 1 point Some recent financial statements for Smolira Golf, Inc., follow. 2009 Current assets Cash Account s receivable Inventor y Total $ $ 2010 2,851 4,707 12,718 20,276 SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2009 and 2010 2009 2010 Assets Liabilities and Owners Equity Current liabilities Accounts $ 2,707 $ 2,213 $ 2,720 payable Notes 5,661 1,810 2,236 payable 13,662 $ 22,030 Other Total Long-term debt Owners equity Common stock and paid-in surplus Accumul ated $ $ 102 4,125 14,500 $ $ 119 5,075 17,260 $ 44,000 15,714 $ 44,000 39,988 Fixed assets retained earnings Net plant and equipment 58,063 84,293 Total Total liabilities and owners equity $ 59,714 $ 83,988 Total assets $ 78,339 $ 106,323 $ 78,339 $ 106,323 Sales Cost of goods sold Depreciatio n EBIT Interest paid Taxable income Taxes Net income SMOLIRA GOLF, INC. 2010 Income Statement $ 189,770 127,403 5,213 $ 57,154 1,310 55,844 19,545 $ $ 12,02 5 24,27 4 36,299 Dividends $ Retained earnings Required: Construct the Du Pont identity for Smolira Golf. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Profit margin Total asset turnover 19.00 1.78 % Equity multiplier Return on equity 1.26 43.00 % eBook Link Worksheet Difficulty: Intermediate Learning Objective: 03-03 Assess the determinants of a firms profitability and growth. Some recent financial statements for Smolira Golf, Inc., follow. 2009 Current assets Cash Account s receivable Inventor y Total $ $ 2010 2,851 4,707 12,718 20,276 SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2009 and 2010 2009 2010 Assets Liabilities and Owners Equity Current liabilities Accounts $ 2,707 $ 2,213 $ 2,720 payable Notes 5,661 1,810 2,236 payable 13,662 $ 22,030 Other Total Long-term debt Owners equity Common stock and paid-in surplus Accumul ated retained earnings $ $ 102 4,125 14,500 $ $ 119 5,075 17,260 $ 44,000 $ 44,000 Fixed assets Net plant and equipment Total assets $ 15,714 39,988 58,063 78,339 $ 84,293 106,323 Total Total liabilities $ $ 59,714 78,339 $ $ 83,988 106,323 and owners equity Sales Cost of goods sold Depreciatio n EBIT Interest paid Taxable income Taxes Net income SMOLIRA GOLF, INC. 2010 Income Statement $ 189,770 127,403 5,213 $ 57,154 1,310 55,844 19,545 $ $ 12,02 5 24,27 4 36,299 Dividends $ Retained earnings Required: Construct the Du Pont identity for Smolira Golf. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Profit margin Total asset turnover Equity multiplier Return on equity % % Explanation: The Du Pont identity is: Profit margin = Net income / Sales = $36,299 / $189,770 = 0.1913 or 19.13% Total asset turnover = Sales / Total assets = $189,770 / $106,323 = 1.78 = Total assets / Total equity = $106,323 / $83,988 = 1.27 Equity multiplier ROE = (PM)(Total asset turnover)(Equity multiplier) ROE = (0.1913)(1.78)(1.27) ROE = 0.4322 or 43.22% 9. award: 1 out of 1 point Some recent financial statements for Smolira Golf, Inc., follow. 2009 Current assets Cash Accoun ts receivable Invento ry Total $ $ 2010 3,121 4,752 12,538 20,411 SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2009 and 2010 2009 2010 Assets Liabilities and Owners Equity Current liabilities Accounts $ 3,157 $ 2,168 $ 2,630 payable 5,751 13,752 $ 22,660 Notes payable Other Total Long-term debt Owners equity Common stock and $ $ 1,765 93 4,026 13,100 $ $ 2,146 110 4,886 15,860 $ 39,500 $ 39,500 Fixed assets Net plant and equipment paid-in surplus Accumul ated retained earnings 51,884 76,917 Total Total liabilities and owners equity $ 15,669 39,331 55,169 $ 78,831 Total assets $ 72,295 $ 99,577 $ 72,295 $ 99,577 Sales Cost of goods sold Depreciatio n EBIT Interest paid Taxable income Taxes Net income SMOLIRA GOLF, INC. 2010 Income Statement $ 187,970 126,503 5,303 $ 56,164 1,400 54,764 19,167 $ $ 11,93 5 23,66 2 35,597 Dividends $ Retained earnings Smolira Golf has 13,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2010 was $80. Requirement 1: What is the price-earnings ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-earnings ratio 29.20 Requirement 2: What is the price-sales ratio?(Round your answer to 2 decimal places (e.g., 32.16).) Price-sales ratio 5.53 Requirement 3: What are the dividends per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Dividends per share $ 0.92 Requirement 4: What is the market-to-book ratio at the end of 2010? (Round your answer to 2 decimal places (e.g., 32.16).) Market-to-book ratio 13.19 times eBook Link Worksheet Difficulty: Intermediate Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios. Some recent financial statements for Smolira Golf, Inc., follow. 2009 Current assets Cash 2010 $ 3,121 SMOLIRA GOLF, INC. Balance Sheets as of December 31, 2009 and 2010 2009 2010 Assets Liabilities and Owners Equity Current liabilities $ 3,157 Accounts $ 2,168 $ 2,630 payable Accoun ts receivable Invento ry Total $ 4,752 12,538 20,411 $ 5,751 13,752 22,660 Notes payable Other Total Long-term debt Owners equity Common stock and paid-in surplus Accumul ated retained earnings 51,884 76,917 Total Total liabilities and owners equity $ $ 1,765 93 4,026 13,100 $ $ 2,146 110 4,886 15,860 $ 39,500 $ 39,500 Fixed assets Net plant and equipment 15,669 39,331 $ 55,169 $ 78,831 Total assets $ 72,295 $ 99,577 $ 72,295 $ 99,577 Sales Cost of goods sold Depreciatio n EBIT Interest paid Taxable income Taxes Net income SMOLIRA GOLF, INC. 2010 Income Statement $ 187,970 126,503 5,303 $ 56,164 1,400 54,764 19,167 $ $ 35,597 Dividends $ Retained earnings 11,93 5 23,66 2 Smolira Golf has 13,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2010 was $80. Requirement 1: What is the price-earnings ratio? (Round your answer to 2 decimal places (e.g., 32.16).) Price-earnings ratio Requirement 2: What is the price-sales ratio?(Round your answer to 2 decimal places (e.g., 32.16).) Price-sales ratio Requirement 3: What are the dividends per share? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Dividends per share $ Requirement 4: What is the market-to-book ratio at the end of 2010? (Round your answer to 2 decimal places (e.g., 32.16).) Market-to-book ratio times Explanation: 1: To find the price-earnings ratio we first need the earnings per share. The earnings per share are: EPS EPS = Net income / Shares outstanding = $35,597 / 13,000 EPS = $2.74 So, the price-earnings ratio is: P/E ratio = Share price / EPS P/E ratio = $80 / $2.74 P/E ratio = 29.22 2: The sales per share are: Sales per share Sales per share Sales per share = Sales / Shares outstanding = $187,970 / 13,000 = $14.46 So, the price-sales ratio is: P/S ratio P/S ratio P/S ratio = Share price / Sales per share = $80 / $14.46 = 5.53 3: The dividends per share are: Dividends per share Dividends per share Dividends per share = Total dividends /Shares outstanding = $11,935 / 13,000 shares = $0.92 per share 4: To find the market-to-book ratio, we first need the book value per share. The book value per share is: Book value per share Book value per share Book value per share = Total equity / Shares outstanding = $78,831 / 13,000 shares = $6.06 per share So, the market-to-book ratio is: Market-to-book ratio = Share price / Book value per share Market-to-book ratio = $80 / $6.06 Market-to-book ratio = 13.19 times 10. award: 0 out of 1 point Fulkerson Manufacturing wishes to maintain a sustainable growth rate of 9.5 percent a year, a debt-equity ratio of 0.49, and a dividend payout ratio of 28 percent. The ratio of total assets to sales is constant at 1.26. Required: What profit margin must the firm achieve? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Profit margin 9.50 % eBook Link Worksheet Difficulty: Intermediate Learning Objective: 03-03 Assess the determinants of a firms profitability and growth. Fulkerson Manufacturing wishes to maintain a sustainable growth rate of 9.5 percent a year, a debt-equity ratio of 0.49, and a dividend payout ratio of 28 percent. The ratio of total assets to sales is constant at 1.26. Required: What profit margin must the firm achieve? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Profit margin % Explanation: To find the profit margin, we can solve the Du Pont identity. First, we need to find the retention ratio. The retention ratio for the company is: b = 1 0.28 b = 0.72 Now, we can use the sustainable growth rate equation to find the ROE. Doing so, we find: Sustainable growth rate = [(ROE)(b)] / [1 (ROE)(b)] 0.095 = [ROE(0.72)] / [1 ROE(0.72)] ROE = 0.1205 or 12.05% Now, we can use the Du Pont identity. We are given the total asset to sales ratio, which is the inverse of the total asset turnover, and the equity multiplier is one plus the debt-equity ratio. Solving the Du Pont identity for the profit margin, we find: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) 0.1205 = (Profit margin)(1 / 1.26)(1 + 0.49) Profit margin = 0.1019 or 10.19%
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