Question

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr			1 Yr Ago			2 Yrs Ago
Assets
Cash	$	31,800		$	34,300		$	36,200
Accounts receivable, net		89,700			62,500			53,300
Merchandise inventory		6,783			83,700			56,600
Prepaid expenses		10,986			9,345			3,665
Plant assets, net		450,731			255,155			190,235
Total assets	$	590,000		$	445,000		$	340,000
Liabilities and Equity
Accounts payable	$	146,910		$	73,701		$	43,534
Long-term notes payable secured by mortgages on plant assets		112,029			100,303			76,643
Common stock, $10 par value		162,500			162,500			162,500
Retained earnings		168,561			108,496			57,323
Total liabilities and equity	$	590,000		$	445,000		$	340,000

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				$	767,000					$	529,550
Cost of goods sold	$	467,870					$	344,208
Other operating expenses		237,770						133,976
Interest expense		13,039						12,180
Income tax expense		9,971						7,943
Total costs and expenses					728,650						498,307
Net income				$	38,350					$	31,243
Earnings per share				$	2.36					$	1.92

Additional information about the company follows.

Common stock market price, December 31, Current Year	$	31.00
Common stock market price, December 31, 1 Year Ago		29.00
Annual cash dividends per share in Current Year		0.24
Annual cash dividends per share 1 Year Ago		0.12

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 7, which company has higher market expectations for future growth?
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 Current Year: – / = % 1 Year Ago: – / = %

Compute the price-earnings ratio for each year. (Round your answers to 2 decimal places.)

	Price-Earnings Ratio Choose Numerator: / Choose Denominator: = Price-Earnings Ratio / = Price-earnings ratio Current Year: / = 1 Year Ago: / =

Assuming Simon's competitor has a price-earnings ratio of 7, which company has higher market expectations for future growth?

	Which company has higher market expectations for future growth?

Compute the dividend yield for each year. (Round your answers to 2 decimal places.)

	Dividend Yield Choose Numerator: / Choose Denominator: = Dividend Yield / = Dividend yield Current Year: / = % 1 Year Ago / = %

Answer 1

Answer to Requirement 1:

Current Year:

Average common stockholders’ equity = Average common stock + Average retained earnings
Average common stockholders’ equity = ($162,500 + $162,500) / 2 + ($168,561 + $108,496) / 2
Average common stockholders’ equity = $301,028.50

Return on common stockholders’ equity = (Net income - Preferred dividend) / Average common stockholders’ equity
Return on common stockholders’ equity = ($38,350 - $0) / $301,028.50
Return on common stockholders’ equity = 0.1274 or 12.74%

1 Year Ago:

Average common stockholders’ equity = Average common stock + Average retained earnings
Average common stockholders’ equity = ($162,500 + $162,500) / 2 + ($108,496 + $57,323) / 2
Average common stockholders’ equity = $245,409.50

Return on common stockholders’ equity = (Net income - Preferred dividend) / Average common stockholders’ equity
Return on common stockholders’ equity = ($31,243 - $0) / $245,409.50
Return on common stockholders’ equity = 0.1273 or 12.73%

Answer to Requirement 2:

Current Year:

Price-earnings ratio = Common stock market price / Earnings per share
Price-earnings ratio = $31.00 / $2.36
Price-earnings ratio = 13.14

1 Year Ago:

Price-earnings ratio = Common stock market price / Earnings per share
Price-earnings ratio = $29.00 / $1.92
Price-earnings ratio = 15.10

Price-earnings ratio of Simon Company is higher than its competitor, so Simon Company has higher market expectations for future growth.

Answer to Requirement 3:

Current Year:

Dividend Yield = Cash dividends per share / Common stock market price
Dividend Yield = $0.24 / $31.00
Dividend Yield = 0.0077 or 0.77%

1 Year Ago:

Dividend Yield = Cash dividends per share / Common stock market price
Dividend Yield = $0.12 / $29.00
Dividend Yield = 0.0041 or 0.41%