Thursday 2 August 2012

Modern Building Supply sells various building materials to retail outlets. The company has just

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 $ 90,000   $ 200,000   
       Marketable securities 0   50,000   
       Accounts receivable, net 650,000   400,000   
       Inventory 1,300,000   800,000   
       Prepaid expenses 20,000   20,000   




  Total current assets 2,060,000   1,470,000  
  Plant and equipment, net 1,940,000   1,830,000  




  Total assets $ 4,000,000   $ 3,300,000  








  Liabilities and Stockholders' Equity
  Liabilities:
       Current liabilities $ 1,100,000   $ 600,000  
       Bonds payable, 12% 750,000   750,000  




  Total liabilities 1,850,000   1,350,000  




  Stockholders' equity:
       Preferred stock, $50 par, 8% 200,000   200,000  
       Common stock, $10 par 500,000   500,000  
       Retained earnings 1,450,000   1,250,000  




  Total stockholders' equity 2,150,000    1,950,000  




  Total liabilities and stockholder's equity $ 4,000,000    $ 3,300,000  










Modern Building Supply
Comparative Income Statement and Reconciliation
 This Year  Last Year
  Sales $ 7,000,000   $ 6,000,000  
  Cost of goods sold 5,400,000   4,800,000  




  Gross margin 1,600,000   1,200,000  
  Selling and administrative expenses 970,000   710,000  




  Net operating income 630,000   490,000  
  Interest expense 90,000   90,000  




  Net income before taxes 540,000   400,000  
  Income taxes (40%) 216,000   160,000  




  Net income 324,000   240,000  




  Dividends paid:
       Preferred dividends 16,000   16,000  
       Common dividends 108,000   60,000  




  Total dividends paid 124,000   76,000  




  Net income retained 200,000 164,000
  Retained earnings, beginning of year 1,250,000   1,086,000  




  Retained earnings, end of year $ 1,450,000   $ 1,250,000  










       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 $45 per share; last year it sold for $36 per share. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.)

   This year    Last year
  Dividend yield ratio %   %  


c.
The dividend payout ratio for common stock. (Do not round intermediate calculations. Round your 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? (Do not round intermediate calculations. Round your 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? (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 $2,700,000.) (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 $1,786,000.) (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

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


c. Is the company’s financial leverage positive or negative?
Positive


Explanation:

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