EXERCISE 1-8 Evaluating Profitability Refer to the financial statements of Mixon

Question

EXERCISE 1-8 Evaluating Profitability Refer to the financial statements of Mixon Company in information about the company is known: Exercises 1-3 and 1-5. The following additional Common stock market prioe, December 31, 2006. . $15.00 Annual cash dividends per share in 2006 . .. .. .. . ...0.60 Annual cash dividends per share in 2005 . . . . . . . . 0.30 To help evaluate the profitability of the company, compute the following for 2006 and 2005: (a) return on common stockholders' equity, (b) price-earnings ratio on December 31, and (c) dividend yield.

Explanation / Answer

Solution: 2006 2005 2004 a) Return on Common stockholders equity: Net income/Average Common Stockholders Equity*100 Shareholders Equity = Common Stock+ Retained Earnings 162500+129100 162500+104750 162500+78250 $291600 $267250 240750 Average common stockholders equity= (291600+267250)/2 (267250+240750)/2 Average common stockholders equity= $279425 $254000 Net Income $34100 $31375 Return on Common stockholders equity $34100/$279425*100 $31375/$254000*100                                12.20                            12.35 Return on Common stockholders equity= 12.20% 12.35% b) Price-earnings Ratio: Market Value Per Share/Earning Per Share $15/$2.10 $14/$1.93 Price-earnings Ratio = 7.14 Times 7.25 Times c) Dividend Yield : Dividend/Market Value per Share*100 0.6/15*100 0.3/14*100                                  4.00                               2.14 Dividend Yield = 4% 2.14%

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