(Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling \(4,200,000.
Jana Kingston Co. |
Current liabilities | \) 300,000 |
Long-term debt, 10% | 1,200,000 |
Common stock (\(20 par) | 2,000,000 |
Retained earnings (Cash dividends, \)328,000) | 700,000 |
| \(4,200,000 |
Mary Ann Benson Co. |
Current liabilities | \) 600,000 |
Common stock (\(20 par) | 2,900,000 |
Retained earnings (Cash dividends, \)328,000) | 700,000 |
| |
| \(4,200,000 |
For the year, each company has earned the same income before interest and taxes.
| Jana Kingston Co. | Mary Ann Benson Co. |
Income before interest and taxes | \)1,200,000 | \(1,200,000 |
Interest expense | 120,000 | 0 |
| 1,080,000 | 1,200,000 |
Income taxes (45% | 486,000 | 540,000 |
Net income | \) 594,000 | \( 660,000 |
At year end, the market price of Kingston’s stock was \)101 per share, and Benson’s was $63.50.
Instructions
- Which company is more profitable in terms of return on total assets?
- Which company is more profitable in terms of return on common stockholders’ equity?
- Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
- From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
- What is the book value per share for each company?
