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You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

Lydex Company Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	930,000	$	1,170,000
Marketable securities		0		300,000
Accounts receivable, net		2,580,000		1,680,000
Inventory		3,570,000		2,200,000
Prepaid expenses		250,000		190,000
Total current assets		7,330,000		5,540,000
Plant and equipment, net		9,460,000		9,020,000
Total assets	$	16,790,000	$	14,560,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,980,000	$	2,920,000
Note payable, 10%		3,640,000		3,040,000
Total liabilities		7,620,000		5,960,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,170,000		1,600,000
Total stockholders' equity		9,170,000		8,600,000
Total liabilities and stockholders' equity	$	16,790,000	$	14,560,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,830,000	$	13,280,000
Cost of goods sold		12,664,000		9,960,000
Gross margin		3,166,000		3,320,000
Selling and administrative expenses		1,402,000		1,592,000
Net operating income		1,764,000		1,728,000
Interest expense		364,000		304,000
Net income before taxes		1,400,000		1,424,000
Income taxes (30%)		420,000		427,200
Net income		980,000		996,800
Common dividends		410,000		498,400
Net income retained		570,000		498,400
Beginning retained earnings		1,600,000		1,101,600
Ending retained earnings	$	2,170,000	$	1,600,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.3
Acid-test ratio	1.1
Average collection period	40	days
Average sale period	60	days
Return on assets	8.9	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.9
Price-earnings ratio	10

2. You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $88 per share and that at the end of last year it was $56. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)

a. The earnings per share.

b. The dividend yield ratio.

c. The dividend payout ratio.

d. The price-earnings ratio.

e. The book value per share of common stock.

Answer 1

a. Computation of earnings per share:

Last year 7000000 Shareholders' equity Book value per share Total number of shares Net income Earnings per share This year 7000000 70 100000 980000 9.8 100000 996800 9.968

This year 7000000 105 106 Shareholders' equity 107 Book value per share 108 Total number of shares 109 Net income 110 Earnings per share Last year 7000000 70 =J106/1107 996800 =J109/J108 =H106/H107 980000 =H109/H108

Hence, earnings per share this year is 9.8 and last year was 9.968.

b.Computation of dividend yield:

Annual Dividend Number of shares Annual dividend per share Price per share Dividend yield This year 410000 100000 4.1 88 0.047 Last year 498400 100000 4.984 56

118 119 Annual Dividend 120 Number of shares 121 Annual dividend per share 122 Price per share 123 Dividend yield This year 410000 =H108 =H119/H120 =H112 =H121/H122 Last year 498400 100000 =J119/J120 =J112 =J121/1122

Hence, dividend yield for this year is 0.047 and for last year was 0.089.

c.Computation of dividend payout ratio:

This year Annual dividend per share - Earnings per share Dividend payout ratio Last year 4.984 9.968 0.50 9.8 0.42

This year 125 126 Annual dividend per share 127 Earnings per share 128 Dividend payout ratio 14.1 9.8 Last year 4.984 9.968 =J126/1127 =H126/H127

Hence, dividend payout ratio for this year is 0.418 and from last year was 0.5.

d. Computation of price-earnings ratio:

This year Market price Earnings per share Price-to-earnings ratio Last year 56 9.968 5.62 9.8 8.98

This year 111 112 Market price 113 Earnings per share 114 Price-to-earnings ratio | Last year 56 = 110 =J112/J113 =H110 =H112/H113

Price-to-earnings ratio for this year is 8.98 and for last year was 5.62.

e.

Book value per share of common stock is $70.