ASSESSMENT
Problem 1
Financial statements for Prater Company appear below:
Prater Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Current assets:
Cash and marketable securities ................................
Accounts receivable, net ...........................................
Inventory ....................................................................
Prepaid expenses ......................................................
Total current assets ......................................................
Noncurrent assets:
Plant & equipment, net..................................................
Total assets ...................................................................
Current liabilities:
Accounts payable ......................................................
Accrued liabilities .......................................................
Notes payable, short term .........................................
Total current liabilities ...................................................
Noncurrent liabilities:
Bonds payable ...........................................................
Total liabilities ...............................................................
Stockholders’ equity:
Preferred stock, $5 par, 5% .......................................
Common stock, $10 par ............................................
Additional paid-in capital--common stock ..................
Retained earnings .....................................................
Total stockholders’ equity .............................................
Total liabilities & stockholders’ equity ...........................
Prater Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ...................................................
Cost of goods sold ........................................................
Gross margin ................................................................
Operating expenses ......................................................
Net operating income ....................................................
Interest expense ...........................................................
Net income before taxes ...............................................
Income taxes (30%) ......................................................
Net income ....................................................................
Year 2
Year 1
$ 140
120
100
50
410
$ 130
110
110
40
390
1,840
$2,250
1,830
$2,220
$ 100
80
210
390
$ 100
80
230
410
460
850
500
910
100
200
260
840
1,400
$2,250
100
200
260
750
1,310
$2,220
$2,000
1,400
600
240
360
50
310
93
$ 217
Dividends during Year 2 totaled $127 thousand, of which $5 thousand were preferred dividends.
The market price of a share of common stock on December 31, Year 2 was $140.
Required:
Compute the following for Year 2:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
Dividend payout ratio.
Dividend yield ratio.
Return on total assets.
Return on common stockholders' equity.
Book value per share.
Working capital.
Current ratio.
Acid-test (quick) ratio.
Accounts receivable turnover.
Average collection period (age of receivables).
Inventory turnover.
Average sale period (turnover in days).
Times interest earned.
Debt-to-equity ratio.
Problem 2
Financial statements for Provost Corporation are presented below. The market price of Provost's
common stock was $25 per share on December 31, Year 2. During Year 2, dividends of $2
million were paid to preferred stockholders and $10 million to common stockholders.
Provost Corporation
Comparative Statement of Financial Position
December 31, Year 1 and Year 2
$(000 omitted)
Assets
Current assets:
Cash ....................................................................................
Short-term marketable securities ........................................
Accounts receivable (net) ....................................................
Inventory ..............................................................................
Total current assets ................................................................
Long-term assets:
Property, plant, and equipment (net) ...................................
Long-term investments ........................................................
Total assets .............................................................................
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ................................................................
Wages payable ....................................................................
Total current liabilities .............................................................
Long-term liabilities:
Bonds payable, 10%............................................................
Total liabilities .........................................................................
Stockholders’ equity:
Preferred stock, 10%, 1,000,000 shares .............................
Common stock, 5,000,000 shares, no par ..........................
Retained earnings ...............................................................
Total stockholders’ equity .......................................................
Total liabilities and stockholders’ equity..................................
Year 2
$
4,000
2,000
20,000
28,000
54,000
Year 1
$
3,600
1,200
16,800
28,800
50,400
75,000
12,000
$141,000
81,600
12,000
$144,000
$
$
7,000
1,000
8,000
6,000
1,200
7,200
24,000
32,000
24,000
31,200
20,000
30,000
59,000
109,000
$141,000
20,000
30,000
62,800
112,800
$144,000
Provost Corporation
Comparative Statement of Income
For the Years Ended December 31, Year 1 and Year 2
$(000 omitted)
Year 2
Sales (all on credit) .................................................................
$280,000
Cost of goods sold ..................................................................
200,000
Gross margin ..........................................................................
80,000
Operating expenses ................................................................
40,000
Net operating income ..............................................................
40,000
Interest expense .....................................................................
5,000
Net income before income tax ................................................
35,000
Income tax expense ................................................................
14,000
Net income ..............................................................................
$ 21,000
Required:
Determine the following for Year 2:
a. Dividend payout ratio.
b. Dividend yield ratio.
c. Price-earnings ratio.
d. Accounts receivable turnover.
e. Inventory turnover.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Was financial leverage positive or negative for Year 2? Explain.
Year 1
$280,000
168,000
112,000
38,000
74,000
4,000
70,000
28,000
$ 42,000