Financial Ratios for Common Stockholders [LO2]

Refer to the financial statements and other data in Problem 15–11 . Assume that you have just inherited several hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited.

Required:

1. You decide first to assess the well-being of the common stockholders. For both this year and last year, compute the following:

a. The earnings per share.

b. The dividend yield ratio for common stock. The company’s common stock is currently selling for $45 per share; last year it sold for $36 per share.

c. The dividend payout ratio for common stock.

d. The price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? Explain.

e. The book value per share of common stock. Does the difference between market value and book value suggest that the stock at its current price is too high? Explain.

2. You decide next to assess the company’s rate of return. Compute the following for both this year and last year:

a. The return on total assets. (Total assets at the beginning of last year were $2,700,000.)

b. The return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year was $1,786,000.)

c. Is the company’s financial leverage positive or negative? Explain.

3. Based on your analytical work (and assuming that you have no immediate need for cash), would you retain or sell the stock you have inherited? Explain.