Concept explainers
1.
Calculate the return on equity for Company AE and Company B. Identify the company having higher return on equity.
1.
Explanation of Solution
Return on equity ratio:
Calculate Company AE’s return on equity:
Given, Net income of Company AE is $204,163 and total stockholders’ equity at beginning and at ending are $1,204,569 and $1,246,791 respectively.
Therefore, return on assets of Company AE is 16.65%.
Calculate Company B’s return on equity:
Given, Net income of Company B is $89,707 and total stockholders’ equity at beginning and at ending are $391,248 and $430,539 respectively.
Therefore, return on assets of Company B is 21.83%.
Therefore, Company B is having higher return on equity as compared to Company AE.
2.
Calculate the dividend yield for Company AE and Company B. Identify the company having higher dividend yield.
2.
Explanation of Solution
Dividend yield: Dividend yield ratio indicates how much percentage of share prices a company pays out in the form of dividends price. The formula to calculate the dividend yield percentage is as follows:
Calculate the dividend yield for Company AE:
Given, the dividend per share is $0.512
Therefore, dividend yield for Company AE is 2.91%.
Calculate the dividend yield for Company B:
Given, the dividend per share is $2.7424
Therefore, dividend yield for Company B is 13.99%.
Therefore, Company B is having higher dividend yield ratio.
3.
Calculate the Price/Earnings ratio for Company AE and Company B. Identify the company trading at a lower price per dollar of earnings.
3.
Explanation of Solution
Price/Earnings Ratio: It depicts the relation of market price of a share to earnings per share of that company. The price/earnings ratio presents the market value of the amount invested to earn $1 by a company. It is major tool to be used by investors before the decisions related to investments in a company.
Calculate the price-earnings ratio for Company AE:
Given, market price per share is $17.56 and earnings’ per share is $1.15 (taken from income statement).
Calculate the price-earnings ratio:
Therefore, price earnings ratio is 15.27 times.
Calculate the price-earnings ratio for Company B:
Given, market price per share is $19.60 and earnings’ per share is $1.86 (taken from income statement).
Calculate the price-earnings ratio:
Therefore, price earnings ratio is 10.54 times.
Company B is trading at a lower price per dollar of earnings.
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Chapter 10 Solutions
Financial Accounting (Connect NOT Included)
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