Question

I have answered this question but there are a few parts that I am struggling with

If the answer could be shown with workings it would be greatly appreciated

Complete the empty frames in the following table and show your work below (identify calculations by letter). For example, Spaling’s interest expense can be inferred from EBIT and Times interest earned, since TIE = EBIT / Interest expense.

EBIT = 300,000, TIE = 30, so 30 = 300,000 / Interest expense, and Interest expense = 300,000 / 30 = 10,000

	Spaling	Preston
EBIT (Earnings before interest and taxes)	300,000	190,000
Interest expense	A	15,000
Net income	200,000	J
Dividend payout ratio	35%	K
Retention ratio	B	60%
Dividends declared during the year	C	40,000
Sales	3,000,000	L
Average assets during the year	D	1,500,000
Average debt during the year	700,000	M
Average shareholders’ equity during the year	1,800,000	N
Asset turnover ratio	E	1.3333
Debt ratio	F	0.3333=1/3
Return on sales	G	0.095
Return on assets	0.08	O
Return on equity	H	0.10
Market price per share, beginning of year	20	P
Market price per share, end of year	15	20
Total shareholder return	I	0.1556
Number of shares outstanding	150,000	50,000
Times interest earned	30	Q

Answer 1

A is already calculated.

B = retention ratio.

Retention ratio = 1 - dividend payout ratio = 1 - 35% = 1-0.35 = 0.65 or 65%

C = dividends declared during the year.

dividends declared during the year = dividend payout ratio * net income = 0.35* $200,000 = $70,000

D = Average assets during the year

Return on assets = Net income/ average assets during the year

Hence, average assets during the year = Net income/return on assets = $200,000/ 0.08 = $2,500,000

E = asset turnover ratio

= Revenue/total assets = $3,000,000/$2,500,000 = 1.2

F = debt ratio

= debt or liabilities/ total assets = $700,000/$2,500,000 = 0.28 or 28%

G = Return on sales

= operating profit/ net sales

operating profit = EBIT. Hence, return on sales = $300,000/$3,000,000 = 0.10 or 10%

H = return on equity = net income/ shareholders equity = net income / (assets-liabilities)

= $200,000 / ($2,500,000 - $700,000) = $200,000/$1,800,000 = 0.1111 = 11.11%

I = shareholders return

= [(market price of the share at the end of the year/ market price of the share at the beginning of the year)-1]*100

=($15/$20-1)*100 = -25%

K = dividend payout ratio = 1- retention ratio = 1-60% = 1-0.60 = 0.40 or 40%

J = net income. dividend payout ratio = dividends during the year/ net income

therefore, net income = dividends during the year/dividend payout ratio = $40,000/ 0.40 = $100,000

L = sales

Asset turnover ratio = Sales or revenue/total assets

Hence Sales = Asset turnover ratio*total assets = $1,500,000*1.3333 = $2,000,000

M = average debt during the year

debt ratio = average debt during the year/ total assets

hence, debt = debt ratio * total assets = 1/3 * $1,500,000 = $500,000

N = Average shareholders’ equity during the year

return on equity = net income/ shareholders equity

shareholders equity = net income/return on equity = $100,000/0.1 = $1,000,000

or shareholders' equity = (assets-liabilities) = $1,500,000- $500,000 = $1,000,000

O = return on assets

= Net income/ average assets during the year = $100,000/$1,500,000 = 0.06667 or 6.67%

P = market price at the beginning of the year

total shareholder return = (market price of the share at the end of the year/ market price of the share at the beginning of the year)-1

0.1556 = ($20 / market price of the share at the beginning of the year)-1

1.1556 * market price of the share at the beginning of the year = $20

Hence, market price of the share at the beginning of the year =$20/1.1556 = $17.31

Q = times interest earned = EBIT/ interest expense $190,000/$15,000 =12.667