Question

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)
	2018	2017	2016	2015	2014
Sales revenue	\)20,000	\(16,000	\)14,000	\(6,000	\)4,000
Net income	2,400	14,000	800	700	250
Average total assets	22,000	19,000	11,500	4,200	3,000
Current assets	8,000	6,000	3,000	1,200	1,000
Working capital	3,600	3,200	1,200	500	400
Common shares: Number of shares Outstanding (000) Average market price	2,000 \(9	2,000 \)6	2,000 $4	20 -	20 -

Instructions

1. Compute the return on assets, profit margin on sales, earnings per share, price-earnings ratio, and current ratio for each of the 5 years for Matheny Inc.

Short answer

	Highest	Lowest
Return on asset	16.7%	7.0%
The profit margin on sales	12.0%	5.7%
Earnings per share	$35.00	$0.40
Price-earnings ratio	10 times	7.5 times
Current ratio	2.14 times	1.67 times

Step-by-step solution

Meaning of Return on asset

Return on assets can be determined by dividing net income by average total assets. It is represented by percentage (%). It is used by the company to test the return of the company to the shareholders.

Computation of Return on Assets

	2018	2017	2016	2015	2014
Return on assets	$2,400 $22,000 10.9%	$14,000 $19,000 7.4%	$800 $11,500 7.0%	$700 $4,200 16.7%	$250 $3,000 8.3%

Working notes:

All the Return on Assets can be calculated by using the formula as follows:

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{asset}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Average}\mathrm{total}\mathrm{assets}}\end{array}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{asset}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Average}\mathrm{total}\mathrm{assets}}\\ & =& \frac{2,4000}{22,000}\\ & =& 10.9\%\end{array}$

Calculation of Profit Margin of sales

	2018	2017	2016	2015	2014
The profit margin on sales	$2,400 $20,000 12.0%	$14,000 $ 16,000 8.8%	$800 $ 14,000 5.7%	$700 $ 6,000 11.7%	$250 $ 4,000 6.3%

Working Notes:

All the profit margins on sales can be calculated by using the formula as follows:

$\text{Return}\text{on}\text{asset}=\frac{\text{Net}\text{income}}{\text{Average}\text{total}\text{asset}}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Profit}\mathrm{margin}\mathrm{on}\mathrm{sales}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Sales}\mathrm{revenue}}\\ & =& \frac{2,400}{20,000}\\ & =& 12\%\end{array}$

Calculation of earnings per share

	2018	2017	2016	2015	2014
Earnings per share	$2,400 2,000 $1.20	$14,000 2,000 $0.70	$800 2,000 $0.40	$700 20 $35.00	$250 20 $12.50

Working Notes:

All the earnings per share can be calculated by using the formula as follows:

$\begin{array}{rcl}\mathrm{Earning}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{outstanding}}\end{array}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Earning}\mathrm{per}\mathrm{share}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{outstanding}}\\ & =& \frac{2,4000}{2,000}\\ & =& \$1.20\end{array}$

Calculation of Price-earnings ratio

	2018	2017	2016	2015	2014
Price-earnings ratio	$9 $1.20 7.5 times	$6 $0.70 8.6 times	$4 $0.40 10 times

Working Notes:

All the price-earnings ratios can be calculated by using the formula as follows:

$\begin{array}{rcl}\mathrm{Price}\mathrm{earning}\mathrm{ratio}& =& \frac{\mathrm{Average}\mathrm{market}\mathrm{price}}{\mathrm{Earning}\mathrm{per}\mathrm{share}}\end{array}$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Price}\mathrm{earning}\mathrm{ratio}& =& \frac{\mathrm{Average}\mathrm{market}\mathrm{price}}{\mathrm{Earning}\mathrm{per}\mathrm{share}}\\ & =& \frac{\$9}{\$1.20}\\ & =& 7.5\mathrm{times}\end{array}$

Calculation of the current ratio

	2018	2017	2016	2015	2014
Current ratio	$8,000 $ 4,400 1.82 times	$6,000 $2,800 2.14 times	$3,000 $1,800 1.67 times	$1,200 $700 1.71 times	$1,000 $600 1.67 times

Working Notes:

All the price-earnings ratios can be calculated by using the formula as follows:

$Currentratio=\frac{Currentassets}{CurrentLiabilities}$

For Current calculating liabilities, use the following formula.

$Currentliabilities=Currentassets-Workingcapital$

Like for the year 2018

$\begin{array}{rcl}\mathrm{Current}\mathrm{liabilities}& =& \mathrm{Current}\mathrm{assets}-\mathrm{Working}\mathrm{capital}\\ & =& \$8,000-\$3,600\\ & =& \$4,400\end{array}$

$\begin{array}{rcl}\mathrm{Current}\mathrm{ratio}& =& \frac{\mathrm{Current}\mathrm{asset}}{\mathrm{Current}\mathrm{liabilities}}\\ & =& \frac{\$8,000}{\$4,400}\\ & =& 1.82\mathrm{times}\end{array}$