Kelley Company reports $1,750,000 of net income for 2013 and declares $245,000 of cash dividends on its preferred stock for 2013. At the end of 2013, the company had 390,000 weighted-average shares of common stock.

Kelley Company reports $1,750,000 of net income for 2013 and declares $245,000 of cash dividends on its preferred stock for 2013. At the end of 2013, the company had 390,000 weighted-average shares of common stock.

 1.

Net income	$	1,750,000
Less preferred dividends		(245,000)
Net income available to common stockholders	$	1,505,000

2.

Net income available to common stockholders	$	1,505,000
Divided by weighted-average outstanding shares		390,000
Basic earnings per share	$	3.86

The stockholders’ equity of TVX Company at the beginning of the day on February 5 follows: Common stock—$10 par value, 150,000 shares authorized, 52,000 shares issued and outstanding $ 520,000 Paid-in capital in excess of par value, common stock 525,000 Retained earnings 675,000 Total stockholders’ equity $ 1,720,000 On February 5, the directors declare a 14% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is $40 per share on February 5 before the stock dividend. The stock’s market value is $35 per share on February 28.

The stockholders’ equity of TVX Company at the beginning of the day on February 5 follows:

Common stock—$10 par value, 150,000 shares authorized,     52,000 shares issued and   outstanding	$	520,000
Paid-in capital in excess of par value, common stock		525,000
Retained earnings		675,000
Total stockholders’ equity	$	1,720,000

On February 5, the directors declare a 14% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is $40 per share on February 5 before the stock dividend. The stock’s market value is $35 per share on February 28.

 

Explanation:

Feb. 5

Shares to be issued: 52,000 shares × 14% = 7,280 shares

Retained Earnings: (7,280 × $40) = $291,200

Common Stock Dividend Distributable: 7,280 shares × $10 per share = $72,800

Paid-In Capital in Excess of Par Value, Common Stock: 291,200 – $72,800 = $218,400

2.

One stockholder owned 750 shares on February 5 before the dividend. Compute the book value per share and total book value of this stockholder’s shares immediately before and after the stock dividend of February 5. (Round your "Book value per share" answers to 2 decimal places.)

 

Explanation:

	Before				After
Total stockholders’ equity	$	1,720,000			$	1,720,000
Issued and distributable shares		÷	52,000			÷	59,280
Book value per share	$		33.08		$		29.01
Shares owned		×	750			×	855	*
Total book value of shares	$		24,808		$		24,808

*750 shares × 114% = 855 shares.

3.

Compute the total market value of the investor’s shares in part 2 as of February 5 and February 28.  (Round your "Dividend per Preferred Share" answers to 2 decimal places.)

 

Explanation:

	February 5				February 28
Market value per share	$	40			$	35
Shares owned		×	750			×	855
Total market value of shares owned	$	30,000			$	29,925

Note: The total market value of the investor’s holdings is approximately the same for February 5 and February 28. Assuming that the stock dividend is the only value-relevant information/event between February 5th and February 28th, these per share values highlight the lack of value distributed in a stock dividend.

Use the following selected data from Success Systems' income statement for the three months ended March 31, 2014, and from its March 31, 2014, balance sheet to complete the requirements below: computer services revenue, $26,050; net sales (of goods), $20,217; total sales and revenue, $46,267; cost of goods sold, $13,676; net income, $20,718; quick assets, $88,904; current assets, $96,504; total assets, $122,312; current liabilities, $1,030; total liabilities, $1,030; and total equity, $121,282.

Use the following selected data from Success Systems' income statement for the three months ended March 31, 2014, and from its March 31, 2014, balance sheet to complete the requirements below: computer services revenue, $26,050; net sales (of goods), $20,217; total sales and revenue, $46,267; cost of goods sold, $13,676; net income, $20,718; quick assets, $88,904; current assets, $96,504; total assets, $122,312; current liabilities, $1,030; total liabilities, $1,030; and total equity, $121,282.

1.

Gross margin with services revenue

Gross margin        = Total revenue − Cost of goods sold                            = $46,267 − $13,676 = $32,591

Gross margin ratio = $32,591 / $46,267 = 70.4%

  

Gross margin without services revenue

Gross margin        = Net (goods) sales − Cost of goods sold                            = $20,217 − $13,676 = $6,541

Gross margin ratio = $6,541 / $20,217 = 32.4%

  

Profit margin ratio = $20,718 / $46,267 = 44.8%

2.

Current ratio = $96,504 / $1,030 = 93.7

Acid-test ratio = $88,904 / $1,030 = 86.3

3.

Debt ratio = $1,030 / $122,312 = 0.8%

Equity ratio = $121,282 / $122,312 = 99.2%

4.

Current assets are 79% of total assets ($96,504 / $122,312)

Long-term assets are 21% of total assets ($25,808 / $122,312)

CommercialServices.com Corporation provides business-to-business services on the Internet.

CommercialServices.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below:

 

Sales	$8,400,000
Net operating income	$800,000
Average operating assets	$3,200,000

   

Consider each of the following requirements independently.

 

Requirement 1:

Compute the company's return on investment (ROI). (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

 

Return on investment (ROI)

%

 

Requirement 2:

The entrepreneur who founded the company is convinced that sales will increase next year by 40% and that net operating income will increase by 160%, with no increase in average operating assets. What would be the company's ROI? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Return on investment (ROI)

%

 

Requirement 3:

The chief financial officer of the company believes a more realistic scenario would be a $1,900,000 increase in sales, requiring a $800,000 increase in average operating assets, with a resulting $330,000 increase in net operating income. What would be the company's ROI in this scenario? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

   

Return on investment (ROI)

%

rev: 05_03_2012, 05_16_2012

Explanation:

1:

Margin =	Net Operating income
	Sales
=	$800,000	= 9.524%
	$8,400,000

   

Turnover =	Sales
	Average operating assets
=	$8,400,000	= 2.625
	$3,200,000

 

ROI	= Margin × Turnover
	= 9.524% × 2.625 = 25%

 
2:

Margin =	Net Operating income
	Sales
=	$800,000(1.00+1.6)
	$8,400,000(1.00+0.4)
=	$2,080,000	= 17.687%
	$11,760,000

    

Turnover =	Sales
	Average operating assets
=	$8,400,000(1.00+0.4)
	$3,200,000
=	$11,760,000	= 3.675
	$3,200,000

 

ROI	= Margin × Turnover
	= 17.687% × 3.675 = 65%

 
3:

Margin  =	Net Operating income
	Sales
=	$800,000+$330,000
	$8,400,000+$1,900,000
=	$1,130,000	= 10.971%
	$10,300,000

    

Turnover =	Sales
	Average operating assets
=	$8,400,000+$1,900,000
	$3,200,000+$800,000
=	$10,300,000	= 2.575
	$4,000,000

  

ROI	= Margin × Turnover
	= 10.971% × 2.575 = 28.25%

Pecs Alley is a regional chain of health clubs. The managers of the clubs, who have authority to make

Pecs Alley is a regional chain of health clubs. The managers of the clubs, who have authority to make investments as needed, are evaluated based largely on return on investment (ROI). The Springfield Club reported the following results for the past year:

 

Sales	$890,000
Net operating income	$18,000
Average operating assets	$98,000

 

The following questions are to be considered independently. Carry out all computations to two decimal places.

 

Requirement 1:

Compute the club's return on investment (ROI). (Round interim calculations to 2 decimal places. Round your answer to the nearest whole percentage. Omit the "%" sign in your response.)

 

Return on investment

%

 

Requirement 2:

Assume that the manager of the club is able to increase sales by $76,000 and that, as a result, net operating income increases by $6,000. Further assume that this is possible without any increase in operating assets. What would be the club’s return on investment (ROI)? (Round interim calculations to 2 decimal places. Round your answer to the nearest whole percentage.Omit the "%" sign in your response.)

 

Return on Investment

%

 

Requirement 3:

Assume that the manager of the club is able to reduce expenses by $2,800 without any change in sales or operating assets. What would be the club’s return on investment (ROI)? (Round interim calculations to 2 decimal places. Round your answer to the nearest whole percentage. Omit the "%" sign in your response.)

 

Return on investment

%

 

Requirement 4:

Assume that the manager of the club is able to reduce operating assets by $21,000 without any change in sales or net operating income. What would be the club’s return on investment (ROI)? (Round interim calculations to 2 decimal places. Round your answer to the nearest whole percentage. Omit the "%" sign in your response.)

 

Return on investment

%

Explanation:

1:

Margin  =	Net Operating income
	Sales
=	$18,000	= 2.02%
	$890,000

 

Turnover =	Sales
	Average operating assets
=	$890,000	= 9.08
	$98,000

ROI	= Margin × Turnover
	= 2.02% × 9.08 = 18%

2:

Margin =	Net Operating income
	Sales
=	$18,000+$6,000
	$890,000+$76,000
=	$24,000	= 2.48%
	$966,000

    

Turnover =	Sales
	Average operating assets
=	$890,000+$76,000
	$98,000
=	$966,000	= 9.86
	$98,000

ROI	= Margin × Turnover
	= 2.48% × 9.86 = 24%

3:

Margin =	Net Operating income
	Sales
=	$18,000+$2,800
	$890,000
=	$20,800	= 2.34%
	$890,000

 

Turnover =	Sales
	Average operating assets
=	$890,000	= 9.08
	$98,000

ROI	= Margin × Turnover
	= 2.34% × 9.08 = 21%

4:

Margin =	Net Operating income
	Sales
=	$18,000	= 2.02%
	$890,000

 

Turnover =	Sales
	Average operating assets
=	$890,000
	$98,000 – $21,000
=	$890,000	= 11.56
	$77,000

ROI	= Margin × Turnover
	= 2.02% × 11.56 = 23%

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $11,500,000 $13,500,000 $24,500,000 Average operating assets $2,875,000 $5,400,000 $4,375,000 Net operating income $517,500 $472,500 $661,500 Minimum required rate of return 14% 12% 14%

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

 

	Division A	Division B	Division C
Sales	$11,500,000	$13,500,000	$24,500,000
Average operating assets	$2,875,000	$5,400,000	$4,375,000
Net operating income	$517,500	$472,500	$661,500
Minimum required rate of return	14%	12%	14%

	Division A	Division B	Division C
Average operating assets	$2,875,000	$5,400,000	$4,375,000
Required rate of return	×14%	×12%	×14%
Minimum required return	$402,500	$648,000	$612,500
Actual net operating income	$517,500	$472,500	$661,500
Minimum required return (above)	18	648,000	612,500
Residual income	$115,000	$(175,500)	$49,000

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £410,000 on sales of £1,400,000. The company's average operating assets for the year were £1,600,000 and its minimum required rate of return was 11%. (The currency used in England is the pound, denoted by £.)

Required:

Compute the company's residual income for the year. (Omit the "£" sign in your response.)

 

Residual income

£

Explanation:

Average operating assets	£1,600,000
Net operating income	£410,000
Minimum required return: 11% × £ 1,600,000	176,000
Residual income	£234,000