(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)
	2018	2017	2016	2015	2014
Sales revenue	\)20,000	\(16,000	\)14,000	\(6,000	\)4,000
Net income	2,400	14,000	800	700	250
Average total assets	22,000	19,000	11,500	4,200	3,000
Current assets	8,000	6,000	3,000	1,200	1,000
Working capital	3,600	3,200	1,200	500	400
Common shares: Number of shares Outstanding (000) Average market price	2,000 \(9	2,000 \)6	2,000 $4	20 -	20 -

Instructions

1. Compute the return on assets, profit margin on sales, earnings per share, price-earnings ratio, and current ratio for each of the 5 years for Matheny Inc.

Return on assets can be determined by dividing net income by average total assets. It is represented by percentage (%). It is used by the company to test the return of the company to the shareholders.

Working notes:

All the Return on Assets can be calculated by using the formula as follows:

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{asset}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Average}\mathrm{total}\mathrm{assets}}\end{array}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{asset}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Average}\mathrm{total}\mathrm{assets}}\\ & =& \frac{2,4000}{22,000}\\ & =& 10.9\%\end{array}$

Working Notes:

All the profit margins on sales can be calculated by using the formula as follows:

$\text{Return}\text{on}\text{asset}=\frac{\text{Net}\text{income}}{\text{Average}\text{total}\text{asset}}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Profit}\mathrm{margin}\mathrm{on}\mathrm{sales}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Sales}\mathrm{revenue}}\\ & =& \frac{2,400}{20,000}\\ & =& 12\%\end{array}$

Working Notes:

All the earnings per share can be calculated by using the formula as follows:

$\begin{array}{rcl}\mathrm{Earning}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{outstanding}}\end{array}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Earning}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{outstanding}}\\ & =& \frac{2,4000}{2,000}\\ & =& \$1.20\end{array}$

Working Notes:

All the price-earnings ratios can be calculated by using the formula as follows:

$\begin{array}{rcl}\mathrm{Price}\mathrm{earning}\mathrm{ratio}& =& \frac{\mathrm{Average}\mathrm{market}\mathrm{price}}{\mathrm{Earning}\mathrm{per}\mathrm{share}}\end{array}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Price}\mathrm{earning}\mathrm{ratio}& =& \frac{\mathrm{Average}\mathrm{market}\mathrm{price}}{\mathrm{Earning}\mathrm{per}\mathrm{share}}\\ & =& \frac{\$9}{\$1.20}\\ & =& 7.5\mathrm{times}\end{array}$

Working Notes:

All the price-earnings ratios can be calculated by using the formula as follows:

$Currentratio=\frac{Currentassets}{CurrentLiabilities}$

For Current calculating liabilities, use the following formula.

$Currentliabilities=Currentassets-Workingcapital$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Current}\mathrm{liabilities}& =& \mathrm{Current}\mathrm{assets}-\mathrm{Working}\mathrm{capital}\\ & =& \$8,000-\$3,600\\ & =& \$4,400\end{array}$

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{asset}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$8,000}{\$4,400}\\ & =& 1.82\mathrm{times}\end{array}$