Chapter 16, Problem 15P

To determine

Concept Introduction:

Ratios:

A ratio can be defined as a measure calculated to know the relation of two variable, that how they depend on each other. An increase in numerator and decrease in denominator will increase the ratio, on the other hand, a decrease in numerator and increase in denominator will decrease the ratio.

Times interest earned ratio:

It is the measure of a company’s ability to pay its debts obligations or interest obligations.

The formula of times interest earned ratio is −

$Times-interest-earned-ratio=\frac{Incomebeforeinterestandtaxes}{Interestexpense}$

Debt to equity:

Debt to equity can be defined as a ratio that measures a company’s financial leverage. It is calculated by dividing total liabilities to total shareholder’s equity.

Debt to equity is calculated as under −

$Debttoequity=\frac{Totalliabilities}{Totalshareholder’sequity}$

Rate of Return on total assets:

Rate of Return on total assets can be defined as the ratio that measures a company’s earnings before interest and taxes (EBIT) against its total net assets or average total assets.

Rate of Return on total assets can be calculated as −

$\text{Rate of Return on Total Assets}=\frac{\text{Net Income}}{\text{Average Total assets}}$

Now, the average total assets are calculated as −

$\text{Average total assets}=\frac{\text{Beginning Total assets}+\text{Ending total assets}}{2}$

Return on Common Stockholder’s Equity:

Return on Common Stockholder’s Equity is the rate of return earned by the Common Stockholders on their investment in the company. It is calculated with the help of following formula:

$\text{Return on Common Stockholder’s Equity = }\frac{\text{Net Income }}{\text{Average Common Stockholder’s Equity}}$

Dividend yield:

Dividend yield can be defined as the measure in which the cash dividend is expressed as a percentage of the current market price. This is calculated in order to know the return earned or the yield generated by the share depending on their current market price.

Dividend yield is calculated as under −

$DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}$

Requirement 1:

To compute:

1. Times interest earned ratio
2. Debt-to-equity ratio
3. Gross margin percentage
4. Return on total assets
5. Return on equity
6. Company’s financial leverage positive or negative

To determine

Requirement 2

To compute the following ratios for this year and the last year −

1. Earnings per share
2. Dividend yield ratio
3. Dividend pay-out ratio
4. Price-earnings ratio
5. Book value per share

To determine

Requirement 3

To compute:

The following ratios for last year and this year −

1. Working capital
2. Current ratio
3. Acid-test ratio
4. Average collection period
5. Average sale period
6. Operating cycle
7. Total asset turnover

To determine

Requirement 4

To prepare:

A brief memo that summarizes how Lydex is performing relative to its competitors.