Question

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr	1 Yr Ago	2 Yrs Ago
Assets
Cash	31,900	34,500	37,200
Accounts receivable, net	89,600	64,500	56,500
Merchandise inventory	90,869	84,600	50,700
Prepaid expenses	10,075	9,532	3,520
Plant assets, net	302,556	251,868	172,080
Total assets	525,000	445,000	320,000
Liabilities and Equity
Accounts payable	134,647	75,205	41,395
Long-term notes payable secured by mortgages on plant assets	96,726	103,374	70,013
Common stock, $10 par value	162,500	162,500	162,500
Retained earnings	131,127	103,921	46,092
Total liabilities and equity	525,000	445,000	320,000

The company’s income statements for the Current Year and 1 Year Ago, follow.

For Year Ended December 31	Current Yr		1 Yr Ago
Sales		682,500		529,550
Cost of goods sold	416,325		344,208
Other operating expenses	211,575		133,976
Interest expense	11,603		12,180
Income tax expense	8,873		7,943
Total costs and expenses		648,376		498,307
Net income		34,124		31,243
Earnings per share		2.10		1.92

Additional information about the company follows.

Common stock market price, December 31, Current Year	30.00
Common stock market price, December 31, 1 Year Ago	28.00
Annual cash dividends per share in Current Year	0.26
Annual cash dividends per share 1 Year Ago	0.13

For both the Current Year and 1 Year Ago, compute the following ratios:

1. Return on common stockholders' equity.
2. Price-earnings ratio on December 31.
2a. Assuming Simon's competitor has a price-earnings ratio of 6, which company has higher market expectations for future growth?
3. Dividend yield.

**There is no incomplete sentences

Answer 1

1.

Return on common stockholders' equity = Net income - Preferred dividend / Average common stockholders

Current year = $34,124 - 0 / $162,500 = 21%

1 year ago = $31,243 - 0 / $162,500 = 19.23%

2.

Price earning ratio = Market price per share / Earning per share

Current year = $30 / $2.10 = 14.29

1 year ago = $28 / $1.92 = 14.58

2a.

Simon company has higher market expectation for future growth.

3.

Dividend yield = Annual cash dividend per share / Market price per share

Current year = $0.26 / $30 = 0.87%

1 year ago = $0.13 / $28 = 0.46%