The return on common stockholders equity stockholders

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Reference no: EM13582633

Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company's financial statements for the most recent two years follow:

Modern Building Supply Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	58,000	$	141,000
Marketable securities		0		13,000
Accounts receivable, net		471,000		286,000
Inventory		931,000		586,000
Prepaid expenses		19,000		23,000

Total current assets		1,479,000		1,049,000
Plant and equipment, net		1,616,944		1,506,047

Total assets	$	3,095,944	$	2,555,047

Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	803,000	$	446,000
Bonds payable, 11%		609,000		609,000

Total liabilities		1,412,000		1,055,000

Stockholders' equity:
Preferred stock, $25 par, 8%		257,500		257,500
Common stock, $10 par		519,000		519,000
Retained earnings		907,444		723,547

Total stockholders' equity		1,683,944		1,500,047

Total liabilities and stockholder's equity	$	3,095,944	$	2,555,047

Modern Building Supply Comparative Income Statement and Reconciliation
		This Year		Last Year
Sales	$	5,002,000	$	4,350,000
Cost of goods sold		3,859,000		3,441,000

Gross margin		1,143,000		909,000
Selling and administrative expenses		643,000		528,000

Net operating income		500,000		381,000
Interest expense		66,990		66,990

Net income before taxes		433,010		314,010
Income taxes (30%)		129,903		94,203

Net income		303,107		219,807

Dividends paid:
Preferred dividends		20,600		20,600
Common dividends		98,610		72,660

Total dividends paid		119,210		93,260

Net income retained		183,897		126,547
Retained earnings, beginning of year		723,547		597,000

Retained earnings, end of year	$	907,444	$	723,547

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:


Current ratio	2.5
Acid-test ratio	1.2
Average collection period	18	days
Average sale period	50	days
Debt-to-equity ratio	0.75
Times interest earned ratio	6.0
Return on total assets	10	%
Price-earnings ratio	9

Assume that you have just inherited several hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited.

Required:
1.	You decide first to assess the well-being of the common stockholders. For both this year and last year, compute the following:

a.	The earnings per share. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

	This year	Last year
Earnings per share	$	$

b.	The dividend yield ratio for common stock. The company's common stock is currently selling for $39 per share; last year it sold for $30 per share. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Dividend yield ratio	%	%

c.	The dividend payout ratio for common stock. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Dividend payout ratio	%	%

d.	The price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

	This year	Last year
Price-earnings ratio

e.	The book value per share of common stock. Does the difference between market value and book value suggest that the stock at its current price is too high? (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	This year	Last year
Book value per share	$	$

2.	You decide next to assess the company's rate of return. Compute the following for both this year and last year:

a.	The return on total assets. (Total assets at the beginning of last year were $2,240,000.) (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Return on total assets	%	%

b.	The return on common stockholders' equity. (Stockholders' equity at the beginning of last year was $1,279,000.) (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Return on common stockholders' equity	%	%

Is the company's financial leverage positive or negative?

	Positive
	Negative

Reference no: EM13582633

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