Medina Corporation has provided the following financial data:Balance SheetDecember 31, Year 2 and Year 1AssetsYear 2Year 1Current assets: Cash$271,000 $190,000 Accounts receivable, net 215,000 190,000 Inventory 117,000 100,000 Prepaid expenses 25,000 30,000 Total current assets 628,000 510,000 Plant and equipment, net 726,000 800,000 Total assets$1,354,000 $1,310,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable$198,000 $170,000 Accrued liabilities 58,000 60,000 Notes payable, short term 102,000 90,000 Total current liabilities 358,000 320,000 Bonds payable 140,000 140,000 Total liabilities 498,000 460,000 Stockholders' equity: Common stock, $5 par
value 500,000 500,000 Additional paid-in capital 80,000 80,000 Retained earnings 276,000 270,000 Total stockholders' equity 856,000 850,000 Total liabilities & stockholders' equity$1,354,000 $1,310,000 Income StatementFor the Year Ended December 31, Year 2Sales (all on account)$1,280,000 Cost of goods sold 840,000 Gross margin 440,000 Operating expenses 413,692 Net operating income 26,308 Interest expense 14,000 Net income before taxes 12,308 Income taxes (35%) 4,308 Net income$8,000 Dividends on common stock during Year 2 totaled $2,000. The market price of common stock at the end of Year 2 was $1.49 per share.Required:a. What is the company's times interest earned ratio for Year 2?b. What is the company's debt-to-equity ratio at the end of Year 2?c. What is the company's equity multiplier at the end of Year 2?d. What is the company's net profit margin percentage for Year 2?e. What is the company's gross margin percentage for Year 2?f. What is the company's return on total assets for Year 2?g. What is the company's return on equity for Year 2?h. What is the company's earnings per share for Year 2?i. What is the company's price-earnings ratio for Year 2?j. What is the company's dividend payout ratio for Year 2?k. What is the company's dividend yield ratio for Year 2?l. What is the company's book value per share at the end of Year 2?
What will be an ideal response?
a.
Times interest earned ratio = Earnings before interest expense and income taxes ÷ Interest expense
= $26,308 ÷ $14,000 = 1.88 (rounded)
b.
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $498,000 ÷ $856,000 = 0.58 (rounded)
c.
Equity multiplier = Average total assets* ÷ Average stockholders' equity**
= $1,332,000 ÷ $853,000 = 1.56 (rounded)
*Average total assets = ($1,354,000 + $1,310,000) ÷ 2 = $1,332,000
**Average stockholders' equity = ($856,000 + $850,000) ÷ 2 = $853,000
d.
Net profit margin percentage = Net income ÷ Sales
= $8,000 ÷ $1,280,000 = 0.6% (rounded)
e.
Gross margin percentage = Gross margin ÷ Sales
= $440,000 ÷ $1,280,000 = 34.4% (rounded)
f.
Return on total assets = Adjusted net income* ÷ Average total assets**
= $17,100 ÷ $1,332,000 = 1.28% (rounded)
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $8,000 + [$14,000 × (1 - 0.35)] = $17,100
**Average total assets = ($1,354,000 + $1,310,000) ÷ 2 = $1,332,000
g.
Return on equity = Net income ÷ Average stockholders' equity*
= $8,000 ÷ $853,000 = 0.94% (rounded)
*Average stockholders' equity = ($856,000 + $850,000) ÷ 2 = $853,000
h.
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $8,000 ÷ 100,000 shares = $0.08 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares
i.
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $8,000 ÷ 100,000 shares = $0.08 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares
Price-earnings ratio = Market price per share ÷ Earnings per share
= $1.49 ÷ $0.08 = 18.63 (rounded)
j.
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $8,000 ÷ 100,000 shares = $0.08 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.02 ÷ $0.08 = 25.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,000 ÷ 100,000 shares = $0.02 per share (rounded)
k.
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.02 ÷ $1.49 = 1.34% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,000 ÷ 100,000 shares = $0.02 per share (rounded)
l.
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $856,000 ÷ 100,000 shares = $8.56 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares
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