Step by Step Assistance

Wednesday, 9 April 2014

Lundberg Corporation's most recent balance sheet and income statement appear below:

Lundberg Corporation's most recent balance sheet and income statement appear below:


Statement of Financial Position
December 31, Year 2 and Year1
(in thousands of dollars)
  Year 2 Year 1
Assets            
  Current assets:            
     Cash $ 200   $ 250  
     Accounts receivable   360     320  
     Inventory   210     270  
     Prepaid expenses   60     60  
 











  Total current assets   830     900  
  Plant and equipment, net   1,860     1,760  
 











  Total assets $ 2,690   $ 2,660  
 

















Liabilities and Stockholders' Equity            
  Current liabilities:            
     Accounts payable $ 287   $ 270  
     Accrued liabilities   75     100  
     Notes payable, short term   200     140  
 











  Total current liabilities   562     510  
  Bonds payable   315     390  
 











  Total liabilities   877     900  
 











  Stockholders' equity:            
     Preferred stock, $100 par value, 10%   650     650  
     Common stock, $1 par value   320     320  
     Additional paid-in capital--common stock   350     350  
     Retained earnings   493     440  
 











  Total stockholders' equity   1,813     1,760  
 











  Total liabilities & stockholders' equity $ 2,690   $ 2,660  
 





















Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
  Sales (all on account)   $ 3,150  
  Cost of goods sold     2,040  
   



 
  Gross margin     1,110  
  Selling and administrative expense     677  
   



 
  Net operating income     433  
  Interest expense     36  
   



 
  Net income before taxes     397  
  Income taxes (30%)     119  
   



 
  Net income   $ 278  
   





 




Dividends on common stock during Year 2 totaled $160 thousand. Dividends on preferred stock totaled $65 thousand. The market price of common stock at the end of Year 2 was $9.46 per share.


Required:
Compute the following for Year 2:


a.
Gross margin percentage. (Round your answer to 1 decimal place.)


  Gross margin percentage %  


b.
Price-earnings ratio. (Round your intermediate calculations to 2 decimal places and final answer to 1 decimal place.)


  Price-earnings ratio times  


c.
Dividend payout ratio. (Round your intermediate calculations to 2 decimal places and final answer to 1 decimal place.)


  Dividend payout ratio %  


d.
Dividend yield ratio. (Round your answer to 2 decimal places.)


  Dividend yield ratio %  


e.
Return on total assets. (Round your intermediate calculations and final answer to 2 decimal places.)


  Return on total assets %  


f.
Return on common stockholders' equity. (Round your answer to 2 decimal places.)


  Return on common stockholders' equity %  


g.
Book value per share. (Round your answer to 2 decimal places.)


  Book value per share
 
$  


h.
Working capital.


  Working captial $  


i.
Current ratio. (Round your answer to 2 decimal places.)


  Current ratio  


j.
Acid-test ratio. (Round your answer to 2 decimal places.)


  Acid-test ratio  


k.
Average collection period. (Assume 365 days a year and round your answer to 1 decimal place.)


  Average collection period days  


l.
Average sale period. (Assume 365 days a year and round your answer to 1 decimal place.)


  Average sale period days  


m.
Times interest earned. (Round your answer to 2 decimal places.)


  Times interest earned  


n.
Debt-to-equity ratio. (Round your answer to 2 decimal places.)


  Debt-to-equity ratio  


Explanation:(All values in thousands.)
a.
Gross margin percentage = Gross margin ÷ Sales = $1,110 ÷ $3,150 = 35.2%

b.
Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding*
= ($278 - $65) ÷ (320 shares + 320 shares) / 2 = $0.67 per share
 
*Number of common shares outstanding for year 2 = Common stock ÷ Par value
= $320 ÷ $1.0 per share = 320 shares
Number of common shares outstanding for year 1 = Common stock ÷ Par value
= $320 ÷ $1.0 per share = 320 shares

c.
Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $9.46 ÷ $0.67 = 14.12

d.
Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.50 ÷ $0.67 = 74.6%
 
*Dividends per share = Common dividends ÷ Common shares (see above)
= $160 ÷ 320 shares = $0.50 per share

e.
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share

= $0.50 ÷ $9.46 = 5.30%

f.
Return on total assets = Adjusted net income* ÷ Average total assets**
= $303.20 ÷ $2,675 = 11.33%
 
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]
= $278 + [$36 × (1 − 0.30)] = $303.2
 
**Average total assets = ($2,690 + $2,660) ÷ 2 = $2,675

g.
Return on common stockholders' equity
= (Net income − Preferred dividends) ÷ Average common stockholders' equity*
= ($278 − $65) ÷ $1,136 = 18.74%
 
*Average common stockholders' equity = ($320 + $350 + $493 + $320 + $350 + $440) ÷ 2 = $1,136

h.
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding (see above)
= ($320 + $350 + $493) ÷ 320 shares = $3.63 per share

i.
Working capital = Current assets - Current liabilities = $830 − $562 = $268 thousand

j.
Current ratio = Current assets ÷ Current liabilities = $830 ÷ $562 = 1.48

k.
Acid-test ratio = Quick assets* ÷ Current liabilities = $560 ÷ $562 = 1.00
 
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= ($200 + $0 + $360 + $0) = $560

l.
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*
= $3,150 ÷ $340 = 9.26
 
*Average accounts receivable balance = ($360 + $320) ÷ 2 = $340

m.
Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 9.26 = 39.4 days

n.
Inventory turnover = Cost of goods sold ÷ Average inventory balance*
= $2,040 ÷ $240 = 8.50
 
*Average inventory balance = ($210 + $270) ÷ 2 = $240

o.
Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 8.50 = 42.9 days

p.
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $433 ÷ $36 = 12.03

q.
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $877 ÷ $1,813 = 0.48