Chapter 11, Problem 11.7BYP

DECISION MAKING ACROSS THE ORGANIZATION

During a recent period, the fast-food drain Wendy’s International purchased many treasury shares. This caused the number of shares outstanding to fall from 124 million to 105 million. The following information was drawn from the company’s financial statements (in millions).

  Instructions

  Use the information provided to answer the following questions.

  (a) Compute earnings per share, return on common stockholders’ equity and return on assets for both years. Discuss the change in the company’s profitability over this period.

  (b) Compute the dividend payout ratio. Also compute the average cash dividend paid per share of common stock (dividends paid divided by the average number of common shares outstanding). Discuss any change in these ratios during this period and the implications for the company’s dividend policy.

  (c) Compute the debt to assets ratio and limes interest earned. Discuss the change in the company’s solvency.

  (d) Based on your findings in (a) and (c), discuss to what extent any change in lie return on common stockholders’ equity was tire result of increased reliance on debt.

  (e) Does it appear that the purchase of treasury stock and the shift toward more reliance on debt were wise strategic moves?