Share outstanding for computing earnings per share $58.01 1. Calculate the follo

Question

Share outstanding for

computing earnings per share

$58.01

1. Calculate the following ratios for each year:

a. Rate earned on total assets

b. Rate earned on stockholders' equity

c. Earnings per share

d. Dividend yield

e.Price-earnings ratio

Deere & Co. manufactures and distributes farm and construction machinery that it sells around the world. In additions to its manufacturing operations, Deere & Co.'s credit division loans money to customers to finance the purchase of their farm and construction equipment. The following information is available for three recent years (in millions except per share amounts): Year 3 Year 2 Year 1 Net Income (loss) $1,865 $874 $2,053 Preferred dividends $0.00 $0.00 $0.00 Interest expense $811 $1,042 $1,137

Share outstanding for

computing earnings per share

424 423 431 Cash dividends per share $1.16 $1.12 $1.06 Average total assets $42,200 $39,934 $38,655 Average stockholders' equity $5,555 $5,676 $6,844 Average stock price per share $60.95 $47.06

$58.01

1. Calculate the following ratios for each year:

a. Rate earned on total assets

b. Rate earned on stockholders' equity

c. Earnings per share

d. Dividend yield

e.Price-earnings ratio

2. What is the ratio of average liabilities to average stockholders' equity for Year 3? 3. Based on these data, evaluate Deere & Co.'s performance.

Explanation / Answer

1. a. Rate earned on total assets = Annual net income/Average Total Assets

Year 3. Year 2. Year 1

1865/42200. 874/39934. 2053/38655

4.42% 2.19% 5.31%

b. Rate earned on stockholders equity =

Annual net income / average stockholders equity

Year 3. Year 2. Year 1

1865/5555. 874/5676. 2053/6844

=33.57 % 15.4% 29.99%

c. Earnings Per Share =(Net Income - Preferred dividend)/ Average commom stock

Year 3. Year 2. Year 1

1865/424. 874/423. 2053/431

= 4.4 =2.07 =4.76

d. dividend yield = annual dividend paid/ stock price

Year 3. Year 2. Year 3

1.16/60.95. 1.12/47.06. 1.06/58.01

= 1.90%. = 2.38%. = 1.83%

e. Price Earning Ratio = stock price per share/ earnings per share

Year 3. Year 2. Year 1

60.95/4.4 47.06/2.07 58.01/4.76

13.86 22.73 12.19

2. Average Liabilities to Stockholders Equity

=Average Liability / Stockholders Equity, where average liability = Average total assets - average stockholder equity ;

= 42200 - 5555 = 36645

= $36645/ 5555

= 6.60

3. It can be observed that the net profit in year 2 declined by huge margin, however it has recovered in Year 3. The profitability ratio has significantly increased in Year 3. However, return on asset being a measure of investment is down in 3rd year in comparison with the 1st year. A decreasing dividend trend might be good for the company as it signals that company is retaining more for future investments. Also, a decreasing interest expense trend says that company is not borrowing excessively to finance the projects which is a healthy sign

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