# Total liabilities total stockholders equity 130000

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Total Liabilities ÷ Total Stockholders' Equity=(\$130,000 + \$150,000) ÷ \$200,000=1.40b.The maximum debt that Montvale can have outstanding is 1.5 times its total stockholders' equity. This means that the total debt Montvale can have outstanding is \$300,000 (1.5 ×\$200,000). Since Montvale already has \$280,000 of outstanding debt, it can incur an additional \$20,000 in debt without violating its debt covenant.12
E5–11Concludedc.The minimum level of stockholders' equity that Montvale can have is total debt divided by 1.5. This means that the total stockholders' equity Montvale can have is \$186,667 (\$280,000 ÷ 1.5). Since Montvale currently has \$200,000 of stockholders' equity, and since dividends decrease stockholders' equity, the maximum dividend that Montvale can declare is \$13,333.d.If Montvale had declared, but not paid, a \$20,000 dividend prior to obtaining the loan, then the \$20,000 is already included in the current liabilities reported on the balance sheet. Paying the dividend would decrease both current assets and current liabilities by \$20,000. Thus, the debt/equity ratio after paying the \$20,000 would be 1.3 ([(\$130,000 – \$20,000) + \$150,000] ÷ \$200,000). Since this ratio is less than the maximum debt/equity ratio allowed under the debt covenant, Montvale could pay the \$20,000 dividend without violating its debt covenant.E5–12a.2006:\$1,217 ÷\$3,544 =34.3%2007:\$1,766 ÷\$2,395 =73.7%2008:\$1,823 ÷\$4,313 =42.3%b.Price Earnings Ratio=Market Price per Share ÷ Earnings per Share=Market Price per Share ÷ (Net Income ÷ Average Number of Common Shares Outstanding)2007:\$58.91 ÷ {\$2,395 ÷ [(1,188 + 1,234) ÷ 2]} = 29.792008:\$62.19 ÷ {\$4,313 ÷ [(1,127 + 1,188) ÷ 2]} = 16.67Dividend Yield = Dividends per Share ÷ Market Price per Share2006:(\$1,217 ÷ 1,234 shares) ÷ \$44.33 = .02232007:(\$1,766 ÷ 1,188 shares) ÷ \$58.91 = .02522008:(\$1,823 ÷ 1,127 shares) ÷ \$62.19 = .0260Stock Price Return=(Market Price1– Market Price0+ Dividends per Share) ÷ Market Price02007:(\$58.91 – \$44.33 + \$1.49) ÷ \$44.33 = 36.3%2008:(\$62.19 – \$58.91 + \$1.62) ÷ \$58.91 = 8.32%
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E5–12Concludedc.An investment in McDonald’s stock from 2006 to 2008 would have provided a very good return for investors in 2007, but a much lower return in 2008 (which matches overall stock market performance for that time period). The dividend yield showed consistent improvement over this time period but the capital appreciation from the stock price lagged in 2008.E5–13a.(1)Earnings per Share=Net Income ÷ Average Number of Common Shares Outstanding=\$7,808 ÷ [(2,169 + 2,133.3) ÷ 2]=\$3.63(2)Price/Earnings=Market Price per Share ÷ Earnings per Share=\$30.40 per Share ÷ \$3.63 per Share =8.37(3)Dividend Yield=Dividends per Share ÷ Market Price per Share=(\$3,278.5 ÷ 2,151.15 Shares) ÷ \$30.40 per Share=.050(4)Stock Price Return=(Market Price1– Market Price0+ Dividends per Share) ÷ Market Price0=(\$30.40 – \$57.37 + \$1.52) ÷ \$57.37 =(44.4%)b.Return on equity equals net income divided by average stockholders' equity. Thus, only those items that affect net income or stockholders' equity would affect a company's return on equity.Declaring and paying dividends would decrease stockholders' equity but would not affect net income. Thus, the return on equity ratio would increase for item (1).A change in the market price of a company's stock would not affect return on equity.Repurchasing common stock would decrease stockholders' equity, but it would not affect net income. Thus, the return on equity ratio would increase for item (3).E5–14a.
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