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Chapter 15: Q21E (page 842)

Data for Oxford State Bank follow:


2018

2017

Net Income

\(71,900

\)64,300

Dividends—Common

22,000

22,000

Dividends—Preferred

16,800

16,800

Total Stockholders’ Equity at Year-End (includes 95,000 shares of common stock)

770,000

610,000


Net Income

\( 71,900

\) 64,300

Market Price per Share of Common Stock

\( 16.50

\) 10.00


Evaluate the common stock of Oxford State Bank as an investment. Specifically,

use the three stock ratios to determine whether the common stock has increased or decreased in attractiveness during the past year. Round to two decimal places.

Short Answer

Expert verified

Answer

The analysis of three stock ratio indicates that attractiveness of common stock of the company has increased because EPS increased from 0.50 to 0.58, Price earnings ratio increased from 20.00 to 28.45 from year 2017 to 2018.

Step by step solution

01

Calculation of EPS & PER

Earnings Per Share = Net Income- Preferred Dividend/ Common Share Outstanding

For 2018

EPS = $71,900-16,800/95,000

= $0.58

For 2017

EPS= $64,300-16,800/95,000

=$0.50

Price-Earnings Ratio= Market Price per share of common stock/ EPS

For 2018

PER = $16.50/$0.58

=28.45

For 2017

PER= $10.00/0.50

=20.00

02

Calculate Dividend Yield Ratio

Dividend Yield Ratio = Annual Dividend per share/ Market price per share

For 2018

Annual dividend for share =Total Dividend Paid / Common Share Outstanding

= $22,000/95,000

=0.23

So, Dividend yield Ratio = $0.23/16.50

=1.40%

For 2017

Annual dividend for share = $22,000/95,000

=0.23

So, Dividend Yield Ratio= $0.23/10.00

=2.3%

03

Calculate dividend payout ratio

Dividend Pay- out Ratio = Annual Dividend per share/ EPS

For 2018

Dividend Pay- out =$0.23/ 0.58

=39.65%

For 2017

Dividend pay- out = $0.23/0.50

=46%

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Most popular questions from this chapter

Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Question: Using ratios to decide between two stock investments

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone, Inc. and have assembled the following data.

Selected income statement data for the current year:

All digital

Green Zone

Net sales revenue (all on credit)

\(417,925

\)493,115

Cost of goods sold

209,000

258,000

Interest expenses

0

14,000

Net income

58,000

72,000

Selected balance sheet and market price data at the end of the current year:

All digital

Green Zone

Current assets:

Cash

\(23,000

\)18,000

Short-term investment

37,000

17,000

Accounts receivables, Net

39,000

49,000

Merchandise inventory

64,000

102,000

Prepaid expenses

21,000

17,000

Total current assets

\(184,000

\)203,000

Total assets

\(263,000

\)326,000

Total current liabilities

105,000

99,000

Total liabilities

105,000

134,000

Common stock:

\(1 par (10,000 shares)

10,000

\)2 par (14,000 shares)

28,000

Total stockholder’s equity

158,000

192,000

Market price per share of common stock

92.80

128.50

Dividend paid per common share

1.20

0.90

Selected balance sheet data at the beginning of the current year:

All digital

Green Zone

Balance sheet:

Accounts receivables, Net

\(41,000

\)54,000

Merchandise inventory

81,000

89,000

Total assets

258,000

277,000

Common stock:

\(1 par (10,000 shares)

10,000

\)2 par (14,000 shares)

28,000

Your strategy is to invest in companies with low price/earnings ratios but in good financial shape. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Requirements

1. Compute the following ratios for both companies for the current year:

a. Acid-test ratio

b. Inventory turnover

c. Days’ sales in receivables

d. Debt ratio

e. Earnings per share of common stock

f. Price/earnings ratio

g. Dividend payout

2. Decide which company’s stock better fits your investment strategy

Traditional Mills’s balance sheet appears as follows (amounts in thousands):

Use the following ratio data to complete Traditional Mills’s balance sheet.

  1. Current ratio is 0.72.

2. Acid-test ratio is 0.36.

Old Mills’s income statement appears as follows (amounts in thousands):

Use the following ratio data to complete Old Mills’s income statement:


1. Inventory turnover is 3.70 (beginning Merchandise Inventory was \(810; ending

Merchandise Inventory was \)770).

2. Profit margin ratio is 14%.

Theta Designs, Inc. has the following data:

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 (\()

2017 (\))

Total current assets

25,000

73,440

Property, Plant and Equipment, Net

153,600

168,300

Other Assets

21,400

64,260

Total Assets

200,000

306,000

Liabilities

Total current liabilities

27,600

49,266

Long term debt

72,400

208,998

Total Liabilities

100,000

258,264

Stockholders’ Equity

Total stockholders’ Equity

100,000

47,736

Total liabilities and stockholders’ equity

200,000

306,000

Perform a vertical analysis of Theta Designs’s balance sheet for each year.
See all solutions

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