Modern Building Supply sells various building materials to retail outlets. The c

ID: 2489015 • Letter: M

Question

Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:

195,378

134,428

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that you have just inherited several hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited.

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

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

The dividend yield ratio for common stock. The company’s common stock is currently selling for $39.88 per share; last year it sold for $34.60 per share. (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.)

You decide next to assess the company’s rate of return. Compute the following for both this year and last year:

The return on total assets. (Total assets at the beginning of last year were $2,210,000.) (Round your intermediate calculations to whole numbers and final answer to 1 decimal place.)

The return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year was $1,309,000.)(Round your intermediate calculations to whole numbers and final answer to 1 decimal place.)

Explanation / Answer

a.) The Earning per Share

Earning per share = Earning available to equity share holder / No. of Equity shares

Earning available to equity share holders = net income after tax - prefrence dividend

This year = 308,448 - 17,500 = 290,948

Last year = 222,348 - 17500 = 204,848

No. of shares = 50,300

b.) Dividend Yield Ratio

Dividend Yield Ratio = Dividend per share / current share price

c.) Dividend Payout ratio

Dividend Payout Ratio =Dividend per share / Earning per share

d.) Price Earning Raio

Price Earning Ratio = Market Value per share / Earning per share

e.) Book Value per Share

Book Value per Share = (Stock holder's Equity - Prefrence Share) / Outstanding Share

a.) Return on Total Asstes

Return on Total Asstes = Net Income / Average total Assets

Average total Assets = Opening Asstes + Closing Asstes / 2

This Year = 2522428+3085806/2 = 2,804,117

Last Year =2210000+2522428/2 = 2,366,214

b.) Return on common stockholders' equity

Return on common stockholders' equity = Net income - Prefrence dividend / Average Common Shareholder's Equity

Average Common Shareholder's Equity = Opening common Stock holders Equity + Closing Common Stock holders Equity / 2

This year = 1474428+1669806/2 =1572117

Last Year = 1309000+1474428/2 = 1391714

c.) Company's Financial Leverage

Financial Leverage = Total Liability / Total Asstes

This Year = 1416000 / 3085806 = 0.46

It is less than 0.5 so it is positive

This year Last year Earning per share $5.78 $4.07

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Modern Building Supply sells various building materials to retail outlets. The c

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