Question

Exercise 13-11 Profitability analysis LO P3

Simon Company’s year-end balance sheets follow.

At December 31	2017			2016			2015
Assets
Cash	$	31,400		$	34,700		$	36,200
Accounts receivable, net		88,500			64,200			58,600
Merchandise inventory		107,339			84,200			50,300
Prepaid expenses		11,047			9,166			3,628
Plant assets, net		331,714			257,734			191,272
Total assets	$	570,000		$	450,000		$	340,000
Liabilities and Equity
Accounts payable	$	143,349		$	76,050		$	44,880
Long-term notes payable secured by mortgages on plant assets		106,088			105,570			73,637
Common stock, $10 par value		162,500			162,500			162,500
Retained earnings		158,063			105,880			58,983
Total liabilities and equity	$	570,000		$	450,000		$	340,000

The company’s income statements for the years ended December 31, 2017 and 2016, follow.

For Year Ended December 31	2017						2016
Sales				$	741,000					$	535,500
Cost of goods sold	$	452,010					$	348,075
Other operating expenses		229,710						135,482
Interest expense		12,597						12,317
Income taxes		9,633						8,033
Total costs and expenses					703,950						503,907
Net income				$	37,050					$	31,593
Earnings per share				$	2.28					$	1.94

Additional information about the company follows.

Common stock market price, December 31, 2017	$	28.00
Common stock market price, December 31, 2016		26.00
Annual cash dividends per share in 2017		0.22
Annual cash dividends per share in 2016		0.11

To help evaluate the company's profitability, compute the following ratios for 2017 and 2016:

1. Return on common stockholders' equity.
2. Price-earnings ratio on December 31.
3. Dividend yield.

Compute the return on common stockholders' equity for each year.

	Return On Common Stockholders’ Equity Choose Numerator: / Choose Denominator: = Return On Common Stockholders’ Equity Net income – Preferred dividends / Average common stockholders’ equity = Return on common stockholders’ equity 2017 $37,050 – 0 / $162,500 = 22.8 % 2016 $31,593 – 0 / = 0 %

Compute the price-earnings ratio for each year. (Round your answers to 2 decimal places.)

• 	Price-Earnings Ratio Choose Numerator: / Choose Denominator: = Price-Earnings Ratio Market price per common share / Earnings per share = Price-earnings ratio 2017 / = 0 2016 / = 0

Compute the dividend yield for each year. (Round your answers to 2 decimal places.)

	Dividend Yield Choose Numerator: / Choose Denominator: = Dividend Yield Annual cash dividends per share / Market price per share = Dividend yield 2017 / = 0 % 2016 / = 0 %

Answer 1

(1)

Return on common stockholders' equity = (net income - preferred dividends)/Average common stockholders’ equity

for 2017:

Average common stockholders’ equity = {($162500 + $158063) + ($162500 + $105880)}/2 = $294471.5

Return on common stockholders' equity = ($37050 - 0)/$294471.5 = 12.58%

for 2016:

Average common stockholders’ equity = {($162500 + $105880) + ($162500 + 58983)}/2 = $244931.5

Return on common stockholders' equity = ($31593 - 0)/$244931.5 = 12.90%

(2)

Price-earnings ratio = market price per share/earning price per share

for 2017

price earning ratio = $28/$2.28 = 12.28 times

for 2016:

price earning ratio = $26/$1.94 = 13.40 times

(3)

Dividend yield = dividend per share/market price per share

for 2017:

dividend yield = $0.22/$28 = 0.79%

for 2016:

dividend yield = $0.11/$26 = 0.42%