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FNT1_Chap14 (7) - Horngren Mozilla Firefox file Edit flew...

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Unformatted text preview: ': Horngren - Mozilla Firefox file Edit flew History flookmarks Iools flelp Ilil'lllf' e x m e la http1#wpscms.pearsoncmg.tomiwpsimediaiobjettsi‘ifi?16I6877765i'hha08_f|ash_main.html?thapter=null&page=745&anchory=nu||&pstart=null&fin ' .3 v: 779923 '.'Virkeeeiv5laiiystmumiratios€-Wg Q! meadows-megabit; .ml’defi. 7 I Wumtxetwéflémmaoemm Q I I] Horngren Horngren 9 Accounting, 8th edition I. Contents } . ._ .. ,,.. .. 2012 Rate of Return on Gammon industry Formula Stockholders’ Equity Average . Preferred Rate of return .. Net mcornea dividends $48,000 _ $0 .. 0 142 £05 on common _ Average cummon $338300 _ ' ' stockholders1 equity stockholders' equity Greg’s return on equity of 0142 is higher than its return on assets of 0.101. This difference results from borrowing at one rateH-‘say, 8%—-and investing the money to earn a higher rate, such as the firm’s 14.2% return on equity. This practice is called trading on the equity, or using leverage. It is directly related to the debt ratio. The higher the debt ratio, the higher the leverage. Companies that finance Operations with debt are said to leverage their positions. Duringgood times, leverage increases profitability. But leverage can have a neg— ative impact on profitability as well. Therefore, leverage is a doubleaodged sword, increasing profits dureng good times but compounding losses during bad times. Compare Greg’s Groovy Tunes’ return on equity with the industry average of 0. [05. Once again, Greg’s Groovy Tunes is performing much better than the average corn- pany in its industry. A return on equity of 15% to 20% year after year is considered good in most industries. At 14.2%, Greg’s is doing wail. Earnings per Share of Common Stock Earnings per share ofcommtm stock, or simply earnings per share (EPS), is perhaps the most widely quoted of all financial statistics. EPS is the only ratio that must appear on the face ofthe income statement. EPS is the amount of net income earned for each share of the company’s outstanding common stock. Recall that Outstanding nod: =‘Issued stack — Treasury stock.- ¢ I||| Read wpscms.pearsoncmg.com ...
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