Exercise 15-19 Shown below is the liabilities and stockholders’ equity section o

Question

Exercise 15-19

Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,487,100.

Jana Kingston Co.

Mary Ann Benson Co.

For the year, each company has earned the same income before interest and taxes.

Jana Kingston Co.

Mary Ann Benson Co.

At year end, the market price of Kingston’s stock was $101 per share, and Benson’s was $63.50. Assume balance sheet amounts are representative for the entire year.

(a) Calculate the return on total assets? (Round answers to 2 decimal places, e.g. 16.85%.)

Return on total assets

Which company is more profitable in terms of return on total assets?

(b) Calculate the return on common stock equity? (Round answers to 2 decimal places, e.g. 16.85%.)

Return on common stock
equity

Which company is more profitable in terms of return on common stock equity?

(c) Calculate the Net income per share. (Round answers to 2 decimal places, e.g. $6.85.)

Net income per share

Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.

(d1) From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding?

(e) What is the book value per share for each company? (Round answers to 2 decimal places, e.g. $6.85.)

Book value per share

Jana Kingston Co.

Mary Ann Benson Co.

Current liabilities $313,900 Current liabilities $809,900 Long-term debt, 11% 1,307,000 Common stock ($20 par) 2,961,000 Common stock ($20 par) 2,150,000 Retained earnings (Cash dividends, $327,600) 716,200 Retained earnings (Cash dividends, $227,400) 716,200 $4,487,100 $4,487,100

Explanation / Answer

(a) Return on total assets = Net income/Total assets Kingston Company: $584226/$4487100 = 13.02% Benson Company: $663300/$4487100 = 14.78% Benson Company is more profitable. (b) Return on common stock equity = Net income/Common stockholders' equity Kingston Company: $584226/($2150000 + $716200) = $584226/$2866200 = 20.38% Benson Company: $663300/($2961000 + $716200) = $663300/$3677200 = 18.04% Kingston Company is more profitable. (c) Net income per share = Net income/Number of shares of common stock outstanding Kingston Company: $584226/107500 = $5.43 Number of shares = $2150000/$20 = 107500 Benson Company: $663300/148050 = $4.48 Number of shares = $2961000/$20 = 148050 Kingston Company has greater net income per share. (d1) No. The net income is reduced due to interest expense on the long-term debt portion. (e) Book value per share = Total common stockholders' equity/Number of common shares Kingston Company: $2866200/107500 = $26.66 Benson Company: $3677200/148050 = $24.84

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