University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

353

Pages:

15
Author:

Braelyn Reeves

Chapter 14 “How Well Am I Doing?” Financial Statement Analysis Learning Objective LO2 To compute and interpret financial ratios that would be useful to a common stockholder 14-41 Ratio Analysis – The Common Stockholder Use this information to calculate ratios to measure the well-being of the common stockholders of Norton Corporation. NORTON CORPORATION 2005 Number of common shares outstanding Beginning of year End of year Net income 17,000 27,400 $ 53,690 Stockholders' equity Beginning of year 180,000 End of year 234,390 Dividends per share Dec. 31 market price per share Interest expense 2 20 7,300 Total assets Beginning of year 300,000 End of year 346,390 14-42 Earnings Per Share Earnings per Share = Net Income – Preferred Dividends Average Number of Common Shares Outstanding Whenever a ratio divides an income statement balance by a balance sheet balance, the average for the year is used in the denominator. 14-43 Earnings Per Share Earnings per Share = Earnings per Share = Net Income – Preferred Dividends Average Number of Common Shares Outstanding $53,690 – 0 (17,000 + 27,400)/2 = $2.42 This measure indicates how much income was earned for each share of common stock outstanding. 14-44 Price-Earnings Ratio Price-Earnings Ratio Price-Earnings Ratio = Market Price Per Share Earnings Per Share = $20.00 = 8.26 times $2.42 This measure is often used by investors as a general guideline in gauging stock values. Generally, the higher the priceearnings ratio, the more opportunity a company has for growth. 14-45 Dividend Payout Ratio Dividend Payout Ratio = Dividend Payout Ratio = Dividends Per Share Earnings Per Share $2.00 = 82.6% $2.42 This ratio gauges the portion of current earnings being paid out in dividends. Investors seeking current income would like this ratio to be large. 14-46 Dividend Yield Ratio Dividend Yield Ratio Dividend Yield Ratio = Dividends Per Share Market Price Per Share = $2.00 = 10.00% $20.00 This ratio identifies the return, in terms of cash dividends, on the current market price of the stock. 14-47 Return on Total Assets Return on = Total Assets Return on = Total Assets Net Income + [Interest Expense × (1 – Tax Rate)] Average Total Assets $53,690 +[7,300 × (1 – .30)] = 18.19% ($300,000 + $346,390) ÷ 2 This ratio measures how well assets have been employed. 14-48 Return on Common Stockholders’ Equity Return on Common = Net Income – Preferred Dividends Stockholders’ Equity Average Stockholders’ Equity Return on Common = $53,690 – 0 = 25.91% ($180,000 + $234,390) ÷ 2 Stockholders’ Equity This measure indicates how well the company employed the owners’ investments to earn income. 14-49 Financial Leverage Financial leverage involves acquiring assets with funds at a fixed rate of interest. Fixed rate of Return on return on investment in > borrowed assets funds Positive = financial leverage Fixed rate of return on borrowed funds Negative = financial leverage Return on investment in < assets 14-50 Quick Check  Which of the following statements is true? a. Negative financial leverage is when the fixed return to a company’s creditors and preferred stockholders is greater than the return on total assets. b. Positive financial leverage is when the fixed return to a company’s creditors and preferred stockholders is greater than the return on total assets. c. Financial leverage is the expression of several years’ financial data in percentage form in terms of a base year. 14-51 Quick Check  Which of the following statements is true? a. Negative financial leverage is when the fixed return to a company’s creditors and preferred stockholders is greater than the return on total assets. b. Positive financial leverage is when the fixed return to a company’s creditors and preferred stockholders is greater than the return on total assets. c. Financial leverage is the expression of several years’ financial data in percentage form in terms of a base year. 14-52 Book Value Per Share Book Value per Share = Book Value per Share Common Stockholders’ Equity Number of Common Shares Outstanding = $234,390 27,400 = $ 8.55 This ratio measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off. 14-53 Book Value Per Share Book Value per Share = Book Value per Share Common Stockholders’ Equity Number of Common Shares Outstanding = $234,390 27,400 = $ 8.55 Notice that the book value per share of $8.55 does not equal the market value per share of $20. This is because the market price reflects expectations about future earnings and dividends, whereas the book value per share is based on historical cost. 14-54