PROBLEMS PROBLEM 9-1
Chapter 9 For the Investor
Earnings Before Interest, Tax,
Minority Share of Earnings, Equity Income and Nonrecurring
Degree of Financial Leverage + ________Items____________ Earnings Before Tax, Minority Share of Earnings, Equity Income, and Nonrecurring Items
$975,000$70,000$1,045,0001.07
$973,000$975,000
PROBLEM 9-2
Earnings Before Interest, TaxMinority Share of Earnings, EquityIncome and Nonrecurring ItemsDegree ofa. Financial LeverageEarnings Before Tax, Minority Shareof Earnings, Equity Income, andNonrecurring Items
= $1,000,000 $800,000
= 1.25
b. Prior earnings before interest and tax $1,000,000 10% increase 100,000 Adjusted income before interest and tax $1,100,000 Interest 200,000 Income before tax $ 900,000 Tax (50% rate) 450,000 Net income $ 450,000 Earnings will increase by 12.5% to $450,000 ($400,000 x 112.5% = $450,000)
c. $800,000 200,000 600,000 300,000 $300,000
This is a decline in profit of 25%, with a decline in earnings before interest and tax of 20%.
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PROBLEM 9-3 Percentage ofa. 1. Earnings Retained
Net income-All dividends
Net Income 2003 2002 2001
$31,200,000 $30,600,000 $29,800,000
21,700,000 19,500,000 18,360,000 910,000 910,000 910,000 $22,610,000 $20,410,000 $19,270,000 8,590,000 10,190,000 10,530,000
27.53% 33.30% 35.34%
Net income (A)
Less:
Common dividends
Preferred dividends
(B) (A) Less (B) = (C) (C) Divided by (A)
2. Price/Earnings Ratio = Market Price Per Share Fully Diluted Earnings Per Share 2003 2002 2001 $12.80 $14.00 $16.30 $ 1.12 $ 1.20 $ 1.27 = 11.43 = 11.67 = 12.83
3. Dividend Payout = Dividends Per Common Share Fully Diluted Earnings Per Share 2003 2002 2001 $ .90 $ .85 $ .82 $1.12 $1.20 $1.27 = 80.36% = 70.83% = 64.57%
4. Dividend Yield = Dividends Per Common Share Market Price Per Common Share 2003 2002 2001 $ .90 $ .85 $ .82 $12.80 $14.00 $16.30 = 7.03% = 6.07% = 5.03%
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Total Stockholders' Equity - 5. Book Value Per Share = Preferred Stock Equity Number of Common Shares Outstanding
Total assets Less:
Liabilities
Stockholders’ Equity Less:
Nonredeemable preferred stock
(A) Common stock equity (B) Shares outstanding end of year
(A) divided by (B)
2003 2002 2001
$1,280,100,000) $1,267,200,000 $1,260,400,000
(800,400,000) (808,500,000) (799,200,000) 479,700,000 458,700,000 461,200,000
(15,300,000) (15,300,000) (15,300,000) $464,400,000 $443,400,000 $445,900,000
24,280,000 23,100,000 22,500,000
$19.13 $19.19 $19.82
b. The percentage of earnings retained is decreasing. The
related ratio, dividend payout, is also increasing.
The price/earnings ratio has been relatively stable. The dividend yield has increased and is relatively high. The
market price per share is substantially below the book value. It appears that this stock is being purchased for the relatively high dividend and not for growth potential.
PROBLEM 9-4 a. 1. Percentage of Earnings Retained = Net Income-All Dividends Net Income
2003 2002 2001
Net income (B) Less:
Cash dividends (A)
(A) divided by (B)
$ 9,100,000 (6,080,000) $ 3,020,000 33.19%
$13,300,000 (5,900,000) $ 7,400,000 55.64%
$16,500,000 (6,050,000) $10,450,000 63.33%
2. Price/Earnings Ratio = Market Price Per Share
Fully Diluted Earnings Per Share 2003 2002 2001 $41.25 $35.00 $29.00 $ 2.30 $ 3.40 $ 4.54 = 17.93 = 10.29 = 6.39
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3. Dividend Payout = Dividends Per Common Share Fully Diluted Earnings Per Share 2003 2002 2001 $1.90 $1.90 $1.90 $2.30 $3.40 $4.54 = 82.61% = 55.88% = 41.85%
4. Dividend Yield = Dividends Per Common Share Market Price Per Common Share 2003 2002 2001 $ 1.90 $ 1.90 $ 1.90 $41.25 $35.00 $29.00 = 4.61% = 5.43% = 6.55%
Market Price Value Value 5. Book Per ShareRatio of Market Price to Book Value 2003 2002 2001 $41.25 $35.00 $29.00 120.5 % 108.0 % 105.0 % = $34.23 = $32.41 = $27.62
b. The percentage of earnings retained materially declined. The related ratio, dividend payout, materially increased.
The price earnings ratio materially increased, which is
difficult to explain, considering the decline in earnings and the other ratios computed.
The dividend yield has declined each year, while the book value per share increased each year.
The increase in market price and the increase in price earnings ratio appears to be explained by the increase in order backlog at year-end and the increase in net contracts awarded.
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PROBLEM 9-5 Simple Earnings Per Share = Net Income - Preferred Dividends Weighted Average Number of Common Shares Outstanding
Year 1 Year 2
$40,000 - $22,500 $42,000 - $27,500
38,000 38,000
$.46 $.38
The decline in earnings per share is caused mainly by the
issuance of preferred stock and partially by a rise in the common shares.
PROBLEM 9-6
Revision of 2002 earnings per share:
2002 reported earnings per share $2.00 July 1, 2003 stock split x .5 Adjusted 2002 earnings per share $1.00 December 31, 2003 stock split x .5 Adjusted 2002 earnings per share $ .50
Comparative Earnings Per Share
2003 2002 Earnings Per Share $1.50 $ .50
PROBLEM 9-7 Numerator Denominator
a. Net income $ 35,000 Preferred dividends (3,000) January 1, 2003 shares of common stock outstanding 20,000 July 1, 2003 common stock issue, 1,000 shares x 1/2 500 $ 32,000 20,500 Earnings per share $1.56
b. From part (a) $ 32,000 20,500 shares Less extraordinary gain 5,000 $ 27,000 20,500 Reccurring earnings per share $1.32
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