Question

Pinnacle Plus declared and paid a cash dividend of $8,100 in the current year. Its comparative financial statements, prepared at December 31, reported the following summarized information:

 

	Current Year				Previous Year
Income Statement
Sales Revenue	$	185,000			$	159,000
Cost of Goods Sold		82,000				78,000
Gross Profit		103,000				81,000
Operating Expenses		51,000				45,000
Interest Expense		5,500				5,500
Income before Income Tax Expense		46,500				30,500
Income Tax Expense (30%)		13,950				9,150
Net Income	$	32,550			$	21,350
Balance Sheet
Cash	$	89,075			$	23,000
Accounts Receivable, Net		32,000				27,000
Inventory		40,000				53,000
Property and Equipment, Net		110,000				120,000
Total Assets	$	271,075			$	223,000
Accounts Payable	$	57,000			$	33,500
Income Tax Payable		1,375				1,250
Note Payable (long-term)		55,000				55,000
Total Liabilities		113,375				89,750
Common Stock (par $10)		99,000				99,000
Retained Earnings		58,700				34,250
Total Liabilities and Stockholders’ Equity	$	271,075			$	223,000

 

Required:

1. Compute the gross profit percentage in the current and previous years. Are the current year results better, or worse, than those for the previous year?
2. Compute the net profit margin for the current and previous years. Are the current year results better, or worse, than those for the previous year?
3. Compute the earnings per share for the current and previous years. Are the current year results better, or worse, than those for the previous year?
4. Stockholders’ equity totaled $115,000 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
5. Net property and equipment totaled $125,000 at the beginning of the previous year. Compute the fixed asset turnover ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
6. Compute the debt-to-assets ratios for the current and previous years. Is debt providing financing for a larger or smaller proportion of the company’s asset growth?
7. Compute the times interest earned ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
8. After Pinnacle Plus released its current year’s financial statements, the company’s stock was trading at $33. After the release of its previous year’s financial statements, the company’s stock price was $30 per share. Compute the P/E ratios for both years. Does it appear that investors have become more (or less) optimistic about Pinnacle’s future success?

Answer 1

1. Gross profit ratio = Gross profit / Revenue

a. Current year = 103,000/ 185,000 = 55.7%

b. Previous year = 81,000/159,000 = 50.9%

Current year gross profit is better than previous year

2. Net profit margin = Net profit/ Revenue

a. Current year = 32,550/ 185,000 = 17.6%

b. Previous year =21,350 /159,000 = 13.4%

Current year net profit margin is better than previous year

3. earnings per share (EPS) = Net profit/ No. Of equity shares

a. Current year = 32,550 / 9,900 = 3.29

b. Previous year = 21,350 / 9,900 = 2.16

EPS has improved from the previous year

4. Return on equity = Net profit/ Share holders equity

Average Share holder's Equity = (opening + Closing equity value)/2

Opening Equity value of previous year = 115,000

Profit earned during the previous years= 21,350

Closing Equity for previous year = 136,350

Profit earned during the current year = 32,550

Closing Equity of current year = 168,800

Previous year equity average = 125,675 [(115,000+136,350)/1]

Current year equity average = 152,575 [(136,350+168,800)/2]

a.Current year return on equity = 32,550/ 152,575 = 21.3%

b.Previous year return on equity = 21,350/ 125,675 = 17.0%

Return on equity is better than the previous year.