Question

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Yaoblorooe e Exercises 817 E15-19 (LO4) (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders' equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000. Muoda Mary Ann Benson Co. Jana Kingston Co. $ 600,000 2,900,000 Current liabilities Common stock ($20 par) Retained earnings (Cash dividends, $328,000) $ 300,000 1,200,000 2,000,000 Current liabilities Long-term debt, 10% Common stock ($20 par) Retained earnings (Cash dividends, $220,000) 700,000 700,000 $4,200,000 $4,200,000 rle 000 For the year, each company has earned the same income before interest and taxes. Mary Ann Benson Co. Jana Kingston Co. Income before interest and taxes $1,200,000 120,000 $1,200,000 -0- Interest expense 1,080,000 486,000 1,200,000 540,000 Invode Terr Income taxes (45%) $ 594,000 $ 660,000 Net income At year end, the market price of Kingston's stock was $101 per share, and Benson's was $63.50. Instructions (a) Which company is more profitable in terms of return on total assets? (b) Which company is more profitable in terms of return on common stockholders' equity? (c) Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year. (d) From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why? (e) What is the book value per share for each company?

Answer 1

a.
	Return on assets=net income /total assets
	= income before interest and taxes- tax/total assets
	For Jana Kingston company:
	= 1200000 (1-0.45)/4200000
	=660000/4200000
	=15.71%
	For Marry Ann Benson CO.
	= 1200000(1-0.45)/4200000
	=660000/4200000
	15.71%
	Hence , in compare of return of assets Marry Ann Benson Company and Marry Ann Benson Company has same return on investmentso both company has equal profitable
b.
	Return on common stockholders' equity= Net income after tax/common shareholder equity
	For Jana Kingston company:
	Return on common stockholders' equity = 594000/(2000000+700000)
	= 594000/2700000
	=22%
	For Marry Ann Benson Company
	Return on common stockholders' equity = 660000/(2900000+700000)
	= 660000/3600000
	= 18.33%
	Hence, in the compare of Return of equity ,Jana Kingston company is more profitable than Marry Ann Benson Commpany because 225 is more then 18.33%
c.	Earning per share (EPS)= (net profit after tax - preference dividend) /number of share
	For Jana Kingston company :
	EPS= 594000-0/($2000000/$20)
	= 594000/100000 SHARE
	= 5.94 per share
	For Marry Ann Benson Company
	EPS=660000-0/($2900000/$20)
	= 660000/145000 Share
	=$4.55 per share
	Hence , Jana Kingston company company has greater net income per share of stock is $5.94 per share .
d.	From the point of view of net income, Jana Kingston company is advantageous to shareholder to have long term debt outstanding , because interest on lonterm debt save the amount of tax of $54000 (120000*45%).Mary Ann Benson Company pay extra tax by $54000 in compare of Jana Kingston company .
e.	Book value of Jana Kingston company = $20
	Book value of Marry Ann Benson Company = $ 20