1) The 2008 financial statements for Fay Thill Country Stores show total assets
ID: 2445493 • Letter: 1
Question
1)
The 2008 financial statements for Fay Thill Country Stores show total assets of $490,000, total liabilities of $290,000, net sales of $1,800,000, net income of $450,000, income from operations of $520,000, cost of goods sold of $1,080,000, preferred dividends of $225,000, and interest expense of $20,000. Total assets and total liabilities for 2007 were $430,000 and $270,000 respectively. Compute the following ratios for 2008:
a. Profit margin
b. Return on assets
c. Return on equity
d. Times-interest-earned
e. Debt ratio
Using this information, a market price of $25 per share, and 100,000 shares of common stock outstanding, compute the following for 2008:
f. Earnings per share
g. Price/earnings ratio
ANSWER:
a) profit margin = net profit / net sales = $450000 / $1800000 = 0.25 = 25%
b) Return on Assets
= net income /Avearge total assets
= $450000 / [( $430000 + $490000) / 2]
= 0.9783
= 97.83 %
c) Return on equity
= net income / Shareholders' equity
= $450000 / ($490000 - $290000)
= 2.25 = 225%
d) Times interest earned
= Operating Income / Interest expense
= $520000 / $20000
= 26
e) Debt ratio
= Debt / equity
= Total liabilities / total assets
= $270000 / $430000
= 0.63
f) Net profit available to common stock holder
= net income - preference dividend
= $450000 - $225000
= $225000
EPS = net income available to common stock holders / number of outstanding shres
= $225000 / 100000
=$2.25
g) Price Earning ratio = Market price of the share / EPS = $25 / $2.25 =11.11
USING THE INFORMATION ABOVE, a market price of $25 per share, and 100,000 shares of common stock outstanding, compute the following for 2008:
1. Earnings per share
2. Price/earnings ratio
Explanation / Answer
a) profit margin = net profit / net sales
= $450000 / $1800000
= 0.25 or 25%
b) Return on Assets = net income /Avearge total assets
= $450000 / [( $430000 + $490000) / 2]
= 0.9783 or 97.83 %
c) Return on equity = net income / Shareholders' equity
= net income / (total assets - total liability)
= $450000 / ($490000 - $290000)
= 2.25 or 225%
d) Times interest earned = Operating Income / Interest expense
= $520000 / $20000
= 26
e) Debt ratio = Total liabilities / total assets
= $290000 / $490000
= 0.59
f) EPS = Earning available to common stock holders / number of outstanding shres
= $225000 / 100000
=$2.25
Note: Earning available to common stock holder = net income - preference dividend
= $450000 - $225000
= $225000
g) Price Earning ratio = Market price / EPS
= $25 / $2.25
=11.11
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