Question

Simon Company's year-end balance sheets follow. At December 31 Current Yr 1 Yr Ago 2 Yrs Ago $ 31,600 $ 34,300 $ 37,600 88,300 63,500 60,000 2,570 83,700 51,900 10,950 3,308 431,580 229,856 157, 192 $565,000 $420,000 $ 310,000 8,644 Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Long-term notes payable secured by mortgages on plant assets Common stock, $10 par value Retained earnings Total liabilities and equity $143,499 $ 71,690 $ 40,102 107,282 95,634 69,880 162,500 162,500 162,500 151,719 90,176 37,518 $565,000 $420,000 $ 310,000 The company's income statements for the Current Year and 1 Year Ago, follow. For Year Ended December 31 Sales Cost of goods sold Other operating expenses Interest expense tax expense Total costs and expenses Net income Current Yr $734,500 $448,045 227,695 12,487 9,549 697,776 $ 36,724 2.26 1 Yr Ago $ 499,800 $324,870 126,449 11,495 7,497 470,311 $ 29,489 $ 1.81 Earnings per share Additional information about the company follows. Common stock market price, December 31, Current Year Common stock market price, December 31, 1 Year Ago Annual cash dividends per share in Current Year Annual cash dividends per share 1 Year Ago $31.00 29.00 0.38 0.19 For both the Current Year and 1 Year Ago, compute the following ratios:

Answer 1

1. Calculation of Return on Common Stockholders' Equity

	Return on Common Stockholders’ Equity
	Choose Numerator	/	Choose denominator	=	Return on Common Stock holders’ Equity
	Net Income available for Common Stockholders	/	Average Common Stockholders’ Equity	=	Return on Common Stock holders’ Equity
Current Year	36724	/	283447.5	=	12.956%
1 Year Ago	29489	/	226347	=	13.028%

Return on Common Stockholders’ Equity = Net Income available for Common Stockholders/                                                                                                 Average Common Stockholder’s Equity

Since, Average Common Stockholders’ Equity= (Common Stockholders’ Equity^a for current Year + Common Stockholders’ Equity^b for previous year)/2

Therefore,

Average Common Stockholders’ Equity for Current year= ($314219¹+$252676²)/2 = $283447.5

Average Common Stockholders’ Equity for 1 year Ago = ($252676²+$200018³)/2 = $226347

^abCommon Stockholders’ Equity= Common Stock+ Retained Earnings

¹ Common Stockholders’ Equity for Current Year= $162500 + $151719 = $314219

² Common Stockholders’ Equity for 1 year Ago = $162500 + $90176 = $252676

³ Common Stockholders’ Equity for 2 years ago= $162500 + $37518 = $200018

2) Calculation of Price-Earning Ratio

Price-Earning Ratio =   Market Price per Share/ Earnings per Share

As given in the question:

For Current Year December 31,

Market Price per Share = 31

Earnings per Share = 2.26

Thus, Price-Earning Ratio = 31/2.26 = 13.717

For 1 Year ago December 31,

Market Price per Share = 29

Earnings per Share = 1.81

Thus, Price-Earning Ratio = 29/1.81 = 16.022

2b) Answer to question, out of Simon and its Competitor, which has higher market expectation for future growth

Since

· It has been assumed in the question that the Price-Earning ratio of Simon’s competitor is 7.

· The Price-Earning ratio of Simon has come out to be 13.717 for the current year

· So, the Price-Earning ratio of Simon is greater than that of its competitor

· Higher Price-Earning ratio indicates that investors expect higher growth of the company and thus are willing to pay a higher price for its shares.

Therefore, Simon has higher market expectation for future growth.

3) Calculation of Dividend Yield

Dividend Yield =    Dividend per Share / Market Price per Share

As given in the question:

For Current Year December 31,

Market Price per Share = 31

Dividend per Share = 0.38

Thus, Dividend Yield = 0.38/31 = 0.01226 or 1.226%

For 1 Year ago December 31,

Market Price per Share = 29

Dividend per Share = 0.19

Thus, Dividend Yield = 0.19/29 = 0.00655 or 0.655%