Assignment
CHAPTER 9-FOR THE INVESTOR
MULTIPLE CHOICE
1. The ratio percentage of earnings retained is the same as that termed:
a. dividend yield.
b. dividend payout.
c. this year's retained earnings to net income.
d. return on common equity.
e. book value.
2. What is the effect of the exercise of stock options?
a. They generate cash to the issuing firm and therefore increase profit per share.
b. They are an expense at the time of exercise. This lowers net income.
c. They increase debt and lower borrowing capacity but have no effect on profit.
d. They increase the number of shares outstanding.
e. They have no immediate effect on profitability.
3. Which of the following is not a reason to interpret book value with caution?
a. Land may be worth more than it cost
b. Depreciable assets may be held
c. Investments may be worth more than their purchase price
d. Patents may have a high market value
e. All of the answers are correct.
4. The price/earnings ratio:
a. measures the past earning ability of the firm.
b. is a gauge of future earning power as seen by investors.
c. relates price to dividends.
d. relates price to total net income.
e. All of the answers are correct.
5. Smith reported the following for 2012.
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Beginning market price
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$20.00
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Average market price
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24.00
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Ending market price
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26.00
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Earnings per share:
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|
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Basic
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1.80
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Diluted
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1.60
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Cash dividends per share
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1.00
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The price earnings ratio and dividend payout were:
a. 16.25 and 62.50%.
b. 16.25 and 65.00%.
c. 17.00 and 62.50%.
d. 15.00 and 62.50%.
e. 15.00 and 60.00%.
TRUE/FALSE
1. The percentage of earnings retained is computed by dividing retained earnings by total stockholders' equity.
2. The use of debt financing creates financial leverage.
3. Dividend yield relates dividends per share to market price per share.
4. Stock appreciation rights can have a material impact on reported earnings.
5. In general, new firms, growing firms, and firms perceived as growth firms will have a relatively low percentage of earnings retained.
PROBLEM
Comparative data for Albers Automotive for the two-year period 2011-2012 are presented below.
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Income Statement Data
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|
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2012
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2011
|
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Net Sales
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$1,500,000
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$1,200,000
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|
Cost of Goods Sold
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934,000
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741,000
|
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Gross Profit
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$ 566,000
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$ 459,000
|
|
Operating Expense
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376,000
|
277,000
|
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Operating Income
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$ 190,000
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$ 182,000
|
|
Other Expense (interest)
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15,000
|
12,000
|
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Earnings Before Income Tax
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$ 175,000
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$ 170,000
|
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Income Taxes
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66,000
|
71,000
|
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Net Income
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$ 109,000
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$ 99,000
|
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Dividends Paid
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48,000
|
42,000
|
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Net Increase in Retained Earnings
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$ 61,000
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$ 57,000
|
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Balance Sheet Data
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Assets
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2012
|
2011
|
|
Cash
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$ 30,000
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$ 10,000
|
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Receivables (net)
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130,000
|
90,000
|
|
Inventory
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170,000
|
113,000
|
|
Land, Buildings, and Equipment (net)
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650,000
|
547,000
|
|
Intangible Assets
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20,000
|
20,000
|
|
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$1,000,000
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$780,000
|
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Liabilities and Stockholders' Equity
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2012
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2011
|
|
Trade Notes and Accounts Payable
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$ 100,000
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$ 40,000
|
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Miscellaneous Current Liabilities
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50,000
|
11,000
|
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5% Bonds Payable
|
300,000
|
240,000
|
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Common Stock, $10 Par
|
100,000
|
100,000
|
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Additional Paid-In Capital
|
51,000
|
51,000
|
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Retained Earnings
|
399,000
|
338,000
|
|
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$1,000,000
|
$780,000
|
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Market price of stock end-of-each year:
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$81
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$68
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Required:
a. Compute the following ratios for both years.
1. net profit margin
2. total asset turnover (use year-end assets)
3. return on assets (use year-end assets)
4. operating income margin
5. operating asset turnover (use year-end assets)
6. return on operating assets (use year-end assets)
7. return on investment (use year-end, long-term debt and stockholders equity)
8. return on total equity (use year-end total equity)
9. basic earnings per share
10. degree of financial leverage
11. price/earnings ratio
12. dividend payout ratio
13. dividend yield
b. Perform a DuPont analysis for both years, using both net profit and operating income. Comment on the results.
c. Comment on the trend in profitability as indicated by the ratios given.
d. Why is return on investment lower than return on equity?
e. Describe the firm's dividend policy. Could this be related to market price?