Question

Exercise 13-11 Profitability analysis LO P3

Simon Company’s year-end balance sheets follow.

At December 31	2017			2016			2015
Assets
Cash	$	31,200		$	34,000		$	36,300
Accounts receivable, net		89,800			62,100			58,800
Merchandise inventory		88,271			84,200			51,400
Prepaid expenses		10,746			10,491			4,247
Plant assets, net		339,983			294,209			239,253
Total assets	$	560,000		$	485,000		$	390,000
Liabilities and Equity
Accounts payable	$	136,651		$	80,326		$	50,450
Long-term notes payable secured by mortgages on plant assets		102,122			110,434			83,604
Common stock, $10 par value		162,500			162,500			162,500
Retained earnings		158,727			131,740			93,446
Total liabilities and equity	$	560,000		$	485,000		$	390,000

The company’s income statements for the years ended December 31, 2017 and 2016, follow.

For Year Ended December 31	2017						2016
Sales				$	728,000					$	577,150
Cost of goods sold	$	444,080					$	375,148
Other operating expenses		225,680						146,019
Interest expense		12,376						13,274
Income taxes		9,464						8,657
Total costs and expenses					691,600						543,098
Net income				$	36,400					$	34,052
Earnings per share				$	2.24					$	2.10

Additional information about the company follows.

Common stock market price, December 31, 2017	$	29.00
Common stock market price, December 31, 2016		27.00
Annual cash dividends per share in 2017		0.34
Annual cash dividends per share in 2016		0.17

To help evaluate the company's profitability, compute the following ratios for 2017 and 2016:

1. Return on common stockholders' equity.
2. Price-earnings ratio on December 31.
3. Dividend yield.

Compute the return on common stockholders' equity for each year.

Return On Common Stockholders’ Equity
	Choose Numerator:			/	Choose Denominator:	=	Return On Common Stockholders’ Equity
		–		/		=	Return on common stockholders’ equity
2017		–		/		=		%
2016		–		/		=		%

Answer 1

Equity = common stock +retained earning

	2017	2016
Beginning equity	294240	162500+93446=255946
Ending equity	162500+158727=321227	162500+131740=294240
Average equity	[294240+321227]/2= 307733.5	[255946+294240]/2=275093
Return on stockholders equity =Net Income /average equity	36400/307733.5=.1183 or 11.83%	34052/275093=.1238 or12.38%

2)PE = market price per share /earning per share

2017:29/2.24= 12.95

2016:27/2.1=12.86

3)Dividend yield : dividend per share /current price

2017 : .34/29=.0117 or 1.17%

2016 : .17/27= .0063 or .63%