You have just been hired as a loan officer at Fairfield State Bank. Your supervi

Question

You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a file containing a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000 five-year loan. Financial statement data on the company for the last two years are given below:

     Marva Rossen, who just two years ago was appointed president of Hedrick Company, admits that the company has been “inconsistent” in its performance over the past several years. But Rossen argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 24% increase in sales over the last year. Rossen also argues that investors have recognized the improving situation at Hedrick Company, as shown by the jump in the price of its common stock from $33 per share last year to $49 per share this year. Rossen believes that with strong leadership and with the modernized equipment that the $1,000,000 loan will enable the company to buy, profits will be even stronger in the future.

     Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Hedrick’s industry:

You decide next to assess the well-being of the common stockholders. For both this year and last year, compute:

The earnings per share. (Round your answers to 2 decimal places.)

The dividend yield ratio for common stock. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

The dividend payout ratio for common stock. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

The price-earnings ratio. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

The book value per share of common stock. (Round your answers to 2 decimal places.)

The gross margin percentage. (Round your answers to 1 decimal place.)

You have just been hired as a loan officer at Fairfield State Bank. Your supervisor has given you a file containing a request from Hedrick Company, a manufacturer of auto components, for a $1,000,000 five-year loan. Financial statement data on the company for the last two years are given below:

Explanation / Answer

2)

a) earning per share = (Net income - Preferred dividend)/ Weighted average no. of shares

This year EPS = (316500-48000)/ 50000 shares = 5.4

Last year EPS = (233300-48000)/ 50000 shares = 3.7

b) Dividend yield ratio for common stcok = Annual dividend per share / Price per share

This year = 1.6 / 49 = 3.3

Last year = 0.8 / 33 = 2.4

c) Dividend Payout Ratio for common stcok = Total Dividend for common stock/ Net Income

This year = 80000 / 316500 = 25.3%

Last year = 40000 / 233300 = 17.1%

d) Price earning ratio = Market value price per share / Earning per share

This year = 49/5.4 = 9.07

Last year = 33/3.7= 8.92

e) Book value per share of common stock = (Stockholder's equity-Preferred stock)/ average shares outstanding

This year = 58.18

Last year = 51.85

f) Gross Margin percentage = Gross Margin / net Sales

This year = 23.8%

Last year = 25.2%

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