Question

P3-1. Calculating Ratios Below are the financial statements for Mowing and Maintenance, Inc.

Paul’s Plowing, Inc. Balance Sheet as of December 31, 2018 and 2017 (in millions of dollars)

Assets 2018 2017

Cash and marketable securities $ 140 $ 120

Accounts receivable $240 $230

Inventory $ 500 $425

Total Current Assets $ 880 $ 775

Liabilities & Equity 2018 2017

Current liabilities:

Accrued wages and taxes $ 80 $ 90

Accounts payable $ 130 $ 120

Notes payable $240 $210

Total Current Liabilities $ 450 $ 420

Long-term debt: $ 900 $ 750

Fixed assets:

Gross plant and equipment $1,180 $1,005

Less: Depreciation $160 $ 150

Net plant and equipment $1,020 $ 855

Other long-term assets $ 300 $ 220

Total Fixed Assets $1,320 $1,075

Stockholders’ equity: Preferred stock (5 million shares) $ 10 $ 10

Common stock and paid-in surplus (10 million shares) $200 $ 200

Retained earnings $640 $470

Total Equity $ 850 $ 680

Total assets $2,200 $1,850

Total liabilities and equity $2,200 $ 1,850

Paul’s Plowing, Inc. Income Statement for Years Ending December 31, 2018 and 2017 (in millions of dollars)

2018 2017

Net sales (all credit) $ 920 $762

Less: Cost of goods sold $410 $325

Gross profits $510 $437

Less: Depreciation $14 $10

Other operating expenses $30 $25

Earnings before interest and taxes (EBIT) $466 $402

Less: Interest $96 $82

Earnings before taxes (EBT) $370 $320

Less: Taxes $148 $128 Per (common) share

data: Earnings per share (EPS) $22.00 $19.00

Dividends per share (DPS) $2.00 $2.00

Book value per share (BVPS) $ 220.00 $185.00

Market value (price) per share (MVPS) $275.00 $237.50

2. Profit margin             2018:                                             28.75%

                                                          2017:                                                28.75%

3. ROA                          2018:                                            19.75%                          2017:                                                               19.75%

4. ROE                          2018:                                                   36.88%                     2017:                                                            36.88%

5. Market-to-book ratio 2018:                                                   2.55 times

                                                              2017:                                                               2.55 times

6. PE ratio                   2018:                                                   15.60 times

                                                              2017:                                                              15.60 times

Answer 1

1. Profit margin=Net income/Sales

2018=(EBT - Taxes)/Sales=(370-148)/920=24.13%

2017=(320-128)/762=25.20%

2. ROA=Net Income/Total assets

2018=(370-148)/2200=10.09%

2017=(320-128)/1850=10.38%

3. ROE=Net income/Total Shareholders equity

2018=(370-148)/850=26.12%

2017=(320-128)/680=28.24%

4. Market to Book ratio=Market value (price) per share (MVPS)/Book value per share (BVPS)

2018=275/220=1.25

2017=237.5/185=1.28

5. PE ratio=Market value (price) per share/Earnings per share

2018=275/22=12.5

2017=237.5/19=12.5