Reference no: EM131697503

Assignment

CHAPTER 9-FOR THE INVESTOR

MULTIPLE CHOICE

1. The ratio percentage of earnings retained is the same as that termed:
a. dividend yield.
b. dividend payout.
c. this year's retained earnings to net income.
d. return on common equity.
e. book value.

2. What is the effect of the exercise of stock options?
a. They generate cash to the issuing firm and therefore increase profit per share.
b. They are an expense at the time of exercise. This lowers net income.
c. They increase debt and lower borrowing capacity but have no effect on profit.
d. They increase the number of shares outstanding.
e. They have no immediate effect on profitability.

3. Which of the following is not a reason to interpret book value with caution?
a. Land may be worth more than it cost
b. Depreciable assets may be held
c. Investments may be worth more than their purchase price
d. Patents may have a high market value
e. All of the answers are correct.

4. The price/earnings ratio:
a. measures the past earning ability of the firm.
b. is a gauge of future earning power as seen by investors.
c. relates price to dividends.
d. relates price to total net income.
e. All of the answers are correct.

5. Smith reported the following for 2012.

Beginning market price	$20.00
Average market price	24.00
Ending market price	26.00
Earnings per share:
Basic	1.80
Diluted	1.60
Cash dividends per share	1.00

The price earnings ratio and dividend payout were:
a. 16.25 and 62.50%.
b. 16.25 and 65.00%.
c. 17.00 and 62.50%.
d. 15.00 and 62.50%.
e. 15.00 and 60.00%.

TRUE/FALSE

1. The percentage of earnings retained is computed by dividing retained earnings by total stockholders' equity.

2. The use of debt financing creates financial leverage.

3. Dividend yield relates dividends per share to market price per share.

4. Stock appreciation rights can have a material impact on reported earnings.

5. In general, new firms, growing firms, and firms perceived as growth firms will have a relatively low percentage of earnings retained.

PROBLEM

Comparative data for Albers Automotive for the two-year period 2011-2012 are presented below.

Income Statement Data
	2012	2011
Net Sales	$1,500,000	$1,200,000
Cost of Goods Sold	934,000	741,000
Gross Profit	$  566,000	$  459,000
Operating Expense	376,000	277,000
Operating Income	$  190,000	$  182,000
Other Expense (interest)	15,000	12,000
Earnings Before Income Tax	$  175,000	$  170,000
Income Taxes	66,000	71,000
Net Income	$  109,000	$   99,000
Dividends Paid	48,000	42,000
Net Increase in Retained Earnings	$   61,000	$   57,000

Balance Sheet Data
Assets	2012	2011
Cash	$ 30,000	$ 10,000
Receivables (net)	130,000	90,000
Inventory	170,000	113,000
Land, Buildings, and Equipment (net)	650,000	547,000
Intangible Assets	20,000	20,000
	$1,000,000	$780,000
Liabilities and Stockholders' Equity	2012	2011
Trade Notes and Accounts Payable	$  100,000	$ 40,000
Miscellaneous Current Liabilities	50,000	11,000
5% Bonds Payable	300,000	240,000
Common Stock, $10 Par	100,000	100,000
Additional Paid-In Capital	51,000	51,000
Retained Earnings	399,000	338,000
	$1,000,000	$780,000
Market price of stock end-of-each year:	$81	$68

Required:

a. Compute the following ratios for both years.

1. net profit margin
2. total asset turnover (use year-end assets)
3. return on assets (use year-end assets)
4. operating income margin
5. operating asset turnover (use year-end assets)
6. return on operating assets (use year-end assets)
7. return on investment (use year-end, long-term debt and stockholders equity)
8. return on total equity (use year-end total equity)
9. basic earnings per share
10. degree of financial leverage
11. price/earnings ratio
12. dividend payout ratio
13. dividend yield

b. Perform a DuPont analysis for both years, using both net profit and operating income. Comment on the results.

c. Comment on the trend in profitability as indicated by the ratios given.

d. Why is return on investment lower than return on equity?

e. Describe the firm's dividend policy. Could this be related to market price?