Suppose that you are considering investing in one of two companies, each in the

Question

Suppose that you are considering investing in one of two companies, each in the same industry. The most recent income statements for each company and other relevant information are as follows:

Required:

Note: Round answers to two decimal places.

Compute the following for each company: (a) earnings per share, (b) dividend yield, (c) dividend payout ratio, (d) price-earnings ratio, (e) return on assets, and (f) return on stockholders' equity.

Answer

Check Figure: a. McGregor EPS = $2.34

b. Fasnacht dividends per common share = $0.78

e. McGregor return on assets = 0.17

Conceptual Connection In which of the two companies would you invest? Explain.

Explanation / Answer

a. Earnings per share=Earnings available to common stockholders/Number of common stock outstanding McGregor company Fasnacht company 1) Net income 2640000 2640000 2) Preferred dividend 300000 100000 (300000*1) (100000*1) 3) Earnings available to common stockholders (1)-(2) 2340000 2540000 4) Number of common stock 1000000 1200000 5) Earnings per share (3/4) 2.34 2.12 b. Dividend yield ratio=Dividend per share/Price per share McGregor company Fasnacht company 1) Dividend 840000 1040000 2) Number of common stock 1000000 1200000 3) Dividend per share (1/2) 0.84 0.87 4)Price per share 5 9.8 5) Dividend yield ratio 16.80% 8.84% c. Dividend payout ratio=Dividend/Net income Mcgregor=840000/2640000=31.82% Fasnacht=1040000/264000=39.40% d. Price earning ratio=Market value per share/Earnins per share Mcgregor=5/2.34=2.14 Fasnacht=9.8/2.12=4.62 e. Return on stockholder's equity=(Net income-preferred dividend)/Average common stockholder's equity McGregor company Fasnacht company 1) Net income 2640000 2640000 2) Preferred dividend 300000 100000 (300000*1) (100000*1) 3) Earnings available to common stockholders (1)-(2) 2340000 2540000 4) Average common equity 10000000 13000000 5) Return on stockholder's equity (3/4) 0.23 0.20

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