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Problem 13-14B Financial Ratios for Common Stockholders [LO13-5, LO13-6]

Kris Building Supply sells various building materials to retail outlets. The company has just approached Kingston State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The companys financial statements for the most recent two years follow:

Kris Building Supply Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	67,500	$	146,500
Marketable securities		9,500		23,500
Accounts receivable, net		483,000		310,000
Inventory		954,640		595,070
Prepaid expenses		25,500		34,500
Total current assets		1,540,140		1,109,570
Plant and equipment, net		1,659,410		1,516,555
Total assets	$	3,200,253	$	2,626,477
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	834,000	$	452,000
Bonds payable, 9%		629,500		629,500
Total liabilities		1,463,500		1,081,500
Stockholders' equity:
Preferred stock, $25 par, 7%		296,500		296,500
Common stock, $10 par		523,000		523,000
Retained earnings		917,253		725,476
Total stockholders' equity		1,736,753		1,544,977
Total liabilities and stockholder's Equity	$	3,200,253	$	2,626,476

Kris Building Supply Comparative Income Statement and Reconciliation
		This Year		Last Year
Sales	$	5,055,000	$	4,399,000
Cost of goods sold		3,899,600		3,472,600
Gross margin		1,155,400		926,400
Selling and administrative expenses		652,900		543,900
Net operating income		502,500		382,500
Interest expense		56,655		56,655
Net income before taxes		445,845		325,845
Income taxes (30%)		133,754		97,754
Net income		312,092		228,092
Dividends paid:
Preferred dividends		20,755		20,755
Common dividends		99,560		74,360
Total dividends paid		120,315		95,115
Net income retained		191,776		132,976
Retained earnings, beginning of year		725,476		592,500
Retained earnings, end of year	$	917,253	$	725,476

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:

Current ratio	2.5
Acid-test ratio	1.2
Average collection period	18	days
Average sale period	50	days
Debt-to-equity ratio	0.75
Times interest earned ratio	6.0
Return on total assets	10	%
Price-earnings ratio	9

Assume that you have just inherited several hundred shares of Kris 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.(Round your answers to 2 decimal places.)

b.	The dividend yield ratio for common stock. The companys common stock is currently selling for $39 per share; last year it sold for $34 per share. (Do not round intermediate calculations. Round your final answers to 1 decimal place.)

c.	The dividend payout ratio for common stock. (Do not round intermediate calculations. Round your final answers to 1 decimal place.)

d.	The price-earnings ratio. (Do not round intermediate calculations. Round your final answers to 1 decimal place.)

e.	The book value per share of common stock. (Round your answers to 2 decimal places.)

2.	You decide next to assess the companys 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 $2,410,000.) (Do not round intermediate calculations. Round your final answers to 1 decimal place.)

b.	The return on common stockholders equity. (Stockholders equity at the beginning of last year was $1,274,500.) (Do not round intermediate calculations. Round your final answers to 1 decimal place.)

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