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Chapter 15: Q20E (page 842)

Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.


MICATIN INC.

Comparative Income Statement

Years Ended December 31, 2019, and 2018

Dollars in thousands

2019

2018

2017

Net Sales Revenue

\( 181,000

\) 160,000

Cost of Goods Sold

93,500

86,500

Selling and Administrative Expenses

45,000

40,500

Interest Expense

8,000

12,000

Income Tax Expense

11,000

10,500

Net Income

\( 23,500

\) 10,500

Additional data:

Total Assets

\( 209,000

\) 187,000

\( 167,000

Common Stockholders’ Equity

96,000

91,500

80,500

Preferred Dividends

2,000

2,000

0

Common Shares Outstanding During the Year

15,000

15,000

10,000

Requirements

  1. Calculate the profit margin ratio for 2019 and 2018.
  2. Calculate the rate of return on total assets for 2019 and 2018.
  3. Calculate the asset turnover ratio for 2019 and 2018.
  4. Calculate the rate of return on common stockholders’ equity for 2019 and 2018.
  5. Calculate the earnings per share for 2019 and 2018.
  6. Calculate the 2019 dividend payout on common stock. Assume dividends per share for common stock are equal to \)1.13 per share.
  7. Did the company’s operating performance improve or deteriorate during 2019?

Short Answer

Expert verified

S. no.

Ratio

2019

2018

1

Profit margin ratio

13.0%

6.6%

2

Return on total assets

15.9%

12.7%

3

Asset turnover ratio

0.91times

0.90 times

4

Return on common stockholders’ equity

22.9%

9.9%

5

Earnings per share

$1.43/share

$0.68/share

6The dividend payout on common stock for 2019 is 19.00%
7Yes, the company’s operating performance improve

Step by step solution

01

Meaning of Profit margin ratio

The profit margin ratio shows the rate of income that remains after all business expenses have been paid. Formula to calculate the profit margin ratio is as follows:

Profit margin ratio =Net incomeNet sales

02

(1) Calculate the profit margin ratio for 2019 and 2018

2019

Profit margin ratio =Net incomeNet sales=$23,500$181,000=0.130 or 13.0%

2018

Profit margin ratio =Net incomeNet sales=$10,500$160,000=0.066 or 6.6%

03

(2) Calculate the rate of return on total assets for 2019 and 2018.

2019

Rate of return on total asset=Net income+Interest expenseAverage total assets=$23,500+$8,000$209,000+$187,0002=0.159 or 15.9%

2018

Rate of return on total asset=Net income+Interest expenseAverage total assets=$10,500+$12,000$187,000+$167,0002=0.127 or 12.7%

04

(3) Calculate the asset turnover ratio for 2019 and 2018.

2019

Asset turnover ratio=Net sales revenueAverage total asset=$181,000$209,000+$187,0002=0.91 times

2018

Asset turnover ratio=Net sales revenueAverage total asset=$160,000$187,000+$167,0002=0.90 times

05

(4) Calculate the rate of return on common stockholders’ equity

2019

Rate of return on common stockholder equity=Net income−Preferred dividendAverage common stockholder's equity=$23,500−$2,000$96,000+$91,5002=0.229 or 22.9%

2018

Rate of return on common stockholder equity=Net income−Preferred dividendAverage common stockholder's equity=$10,500−$2,000$91,500+$80,5002=0.090 or 9.9%

06

(5) Calculate the earnings per share for 2019 and 2018

2019

Earning per share=Net income−Preferred dividendWeighted average number of common=$23,500−$2,00015,000 shares=$1.43/share

2018

Earning per share=Net income−Preferred dividendWeighted average number of common=$10,500−$2,00015,000 shares+10,000 sahres2=$0.68/share

07

(6) Calculate the 2019 dividend pay-out on common stock

Dividend payout=Annual dividend per shareEarning per share=$1.13 per share$1.43 per share=0.790 or 79.0%

08

(7) Analysing the company’s performance

The company’s performance improved during 2019 based on an improvement in all ratios evaluated.

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Most popular questions from this chapter

What are some common red flags in financial statement analysis?

Evaluating current ratio

Requirements

1. Compute Accel’s Companies’ current ratio at May 31, 2018 and 2017.

2. Did Accel’s Companies’ current ratio improve, deteriorate, or hold steady during 2018?

Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Question: What is horizontal analysis, and how is a percentage change computed?

Theta Designs, Inc. has the following data:

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 (\()

2017 (\))

Total current assets

25,000

73,440

Property, Plant and Equipment, Net

153,600

168,300

Other Assets

21,400

64,260

Total Assets

200,000

306,000

Liabilities

Total current liabilities

27,600

49,266

Long term debt

72,400

208,998

Total Liabilities

100,000

258,264

Stockholders’ Equity

Total stockholders’ Equity

100,000

47,736

Total liabilities and stockholders’ equity

200,000

306,000

Perform a vertical analysis of Theta Designs’s balance sheet for each year.
See all solutions

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