Question

E11-12 Suppose the following financial information is available for Walgreen Company 2016 (in millions) Average common stockholders' equity Dividends declared for common stockholders Dividends declared for preferred stockholders Net income 2017 $13,622.5 471 $11,986.5 394 0 2,157 2,006 Instructions Calculate the payout ratio and return on common stockholders' equity for 2017 and 2016. Comment on your findings.

Answer 1

Payout Ratio

Payout Ratio – 2017

Payout Ratio = (Total Dividend Declared / Net Income) x 100

= ($471 / $2,006) x 100

= 23.48%

Payout Ratio – 2016

Payout Ratio = (Total Dividend Declared / Net Income) x 100

= ($394 / $2,157) x 100

= 18.27%

Return on Common Stockholders’ Equity

Return on Common Stockholders’ Equity – 2017

Return on Common Stockholders’ Equity = [(Net Income – Preferred Dividend) / Average Common Stockholders Equity) x 100

= [($2,006 - $0) / $13,622.50] x 100

= 14.73%

Return on Common Stockholders’ Equity – 2016

Return on Common Stockholders’ Equity = [(Net Income – Preferred Dividend) / Average Common Stockholders Equity) x 100

= [($2,157 - $0) / $11,986.50] x 100

= 18.00%

Comment on the above ratios

When the dividend payout ratio is higher in 2017, the Return on Common Stockholders Equity is less and When the dividend payout ratio is less in 2016, the Return on Common Stockholders Equity is more.