Specific Ratios

Specific ratios related to financial analysis

Index

1. Financial Leverage or Capital Gearing 2. Dividend Payout Ratio3. Price Earnings P/E Ratio4. Dividend Yield Ratio5. EBITDA Margin6. Retention Rate7. Cash Coverage Ratio

Ratio # 1 Financial Leverage or Capital Gearing Preference shares carry a fixed rate of dividend and debentures carry a fixed rate of interest. The equity shares are paid dividend out of profits left after payment of interest on debentures, and dividend on preference shares.

Thus, dividend on equity shares may vary year after year. Equity shares are known as variable return securities and debentures and preference shares as fixed return securities. If the rate of return on fixed return securities is lower than the rate of earnings of the company, the return on equity shares will be higher.

This phenomenon is known as financial leverage or capital gearing. Thus, financial leverage is an arrangement under which fixed return bearing securities (debentures and preference shares) are used to raise cheaper funds to increase the return to equity shareholders. It may be noted that a lever is used to lift something heavy by applying less force than required otherwise.

Capital gearing denotes the ratio between various types of securities and Under-Capitalization total capitalisation. Capitalisation of a company is highly geared when the proportion of equity to total capitalisation is small and it is low geared when the equity capital dominates the capital structure.

Capital gearing ratio represents the relationship between equity share capital of a firm and its

fixed interest bearing funds. Fixed interest bearing funds include preference share capital,

debentures, bonds and other type of loans which bear a fixed rate of interest on it.

This ratio is used to measure the ‘degree of leverage’ of a firm. A firm having low capital gearing

ratio will be called as highly leveraged and vice versa.

Equity share capital

Fixed interest bearing fundsWhere:

Equity share capital refers to total share capital plus reserves minus preference share capital.


Capital gearing is calculated by determining the ratio between the amount of equity capital (representing variable income bearing securities) and the total amount of securities (equity shares, preference shares and debentures) issued by a company.

Q1: Each of the two companies have issued the total securities worth Rs. 20,00,000 and they have equity shares worth Rs. 5,00,000 and Rs. 15,00,000 respectively. Company A is highly geared as the ratio between equity capital to total capitalization is small, i.e., 25%. But in case of Company B, this ratio is 75%, so it is low geared.

The various securities issued should bear such ratio to total capitalisation that capital structure

is safe and economical. Equity shares should be issued where there is uncertainty of earnings. Preference shares, particularly the cumulative ones, should be issued when the average earnings are expected to be fairly good. Debentures should be issued when the company expects fairly higher earnings in future to pay interest to the debenture holders and increase the return of equity shareholders.

Q 2:

Let’s assume that ABC Ltd Company has following figures on its balance sheet:

2012

Equity share capital 1,00,00,000

Preference share capital 28,00,000

Debentures 25,00,000

Bonds 27,00,000

http://cdn.yourarticlelibrary.com/wp-content/uploads/2014/02/clip_image002277.jpg


Using the above given figures, we are able to calculate capital gearing ratio for year 2012 and 2013 separately.

Solution: For the year 2012:

1, 00, 00,000 / 80, 00,000 = 1.25: 1

For the year 2013:

92.0, 00,000/ 1, 12, 50,000 = 0.8: 1The above results show that the company was low geared (leveraged) in 2012 whereas it was

highly geared (leveraged) in the year 2013.

Q 3. From the following information find out capital gearing ratio.

Source 2005 2006

Amount (Rs) Amount (Rs)

Equity share capital 500,000 400,000

Reserves & surplus 300,000 200,000

8% preference share capital 250,000 300,000 6% Debentures 250,000 400,000

Ratio # 2 Dividend Payout Ratio

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.

Investors are particularly interested in the dividend payout ratio because they want to know if companies are paying out a reasonable portion of net income to investors. For instance, most startup companies and tech companies rarely give dividends at all. In fact, Apple, a company formed in the 1970s, just gave its first dividend to shareholders in 2012.

Conversely, some companies want to spur investors' interest so much that they are willing to pay out unreasonably high dividend percentages. Inventors can see that these dividend rates


can't be sustained very long because the company will eventually need money for its operations.

FormulaThe dividend payout formula is calculated by dividing total dividend by the net income of the company.

This calculation will give you the overall dividend ratio. Both the total dividends and the net income of the company will be reported on the financial statements.

You can also calculate the dividend payout ratio on a share basis by dividing the dividends per

share by the earnings per share.

Obviously, this calculation requires a little more work because you must figure out the earnings

per share as well as divide the dividends by each outstanding share. Both of these formulas will

arrive at the same answer however.

Analysis

Since investors want to see a steady stream of sustainable dividends from a company, the

dividend payout ratio analysis is important. A consistent trend in this ratio is usually more

important than a high or low ratio.

Since it is for companies to declare dividends and increase their ratio for one year, a single

high ratio does not mean that much. Investors are mainly concerned with sustainable

trends. For instance, investors can assume that a company that has a payout ratio of 20

percent for the last ten years will continue giving 20 percent of its profit to the shareholders.

Conversely, a company that has a downward trend of payouts is alarming to investors. For

example, if a company's ratio has fallen a percentage each year for the last five years might

indicate that the company can no longer afford to pay such high dividends. This could be an

indication of poor operating performance.

Generally, more mature and stable companies tend to have a higher ratio than newer start

up companies.

http://en.wikipedia.org/wiki/Dividend

http://www.myaccountingcourse.com/financial-ratios/earnings-per-share

http://www.myaccountingcourse.com/financial-ratios/earnings-per-share


Q3.Joe's Kitchen is a restaurant change that has several shareholders. Joe reported $10,000 of net income on his income statement for the year. Joe's issued $3,000 of dividends to its shareholders during the year. Find out Joe's dividend payout ratio calculation.

Solution:

As you can see, Joe is paying out 30 percent of his net income to his shareholders. Depending on Joe's debt levels and operating expenses, this could be a sustainable rate since the earnings appear to support a 30 percent ratio.

Practical Uses for the Dividend Payout and Retention RatiosThe Dividend Payout Ratio is a calculation used to measure the percentage of a company’s net income that is paid to shareholders as dividends; whereas the Retention Ratio is a measure that determines the portion of earnings that are reinvested back into the business.

Q 4.Company XYZ had quarterly dividend payments last year of 70 cents per share, which equals a total annual dividend per share of $2.80. XYZ also reported earnings per share of $5.60. How would you calculate the Dividend Payout Ratio?

Dividend Payout Ratio (DPR) = Annual Dividend per share/Earnings per share

DPR = 2.80/5.60DPR = 0.50 or 50%

The Retention Ratio is the exact opposite of the dividend payout ratio, and it is calculated by taking 1 minus the DPR. So, the Retention Ratio for McDonald’s would be 50% = 1-50%.

What Does It All Mean?For investors seeking income, the dividend payout ratio and dividend yield (current dividend/current price) are useful tools to gauge the annual income generated from the investment and to compare a company versus its industry peers or another income stock that you may be considering. If the dividend payout ratio is 53.5%, then investors can expect the company to pay out 53.5 cents on every dollar earned by the company and


reinvest the remaining 46.5 cents. Low payouts would indicate that the company might be in growth mode or fairly new; whereas high payouts can indicate maturity.

Companies like AT&T have dividend payout ratios that well exceed 100%. A DPR exceeding 100% indicates that a company is paying out more than it is earning. High payouts can be problematic and harmful to companies looking to expand or build positive cash flow. In 2013, Century Link (NYSE:CTL) reduced its quarterly dividend from 72 cents in 2012 down to 54 cents in 2013 to sustain its business model. Dividend reductions are generally not a positive indicator for the financial condition of a company; thus it can lead to a decrease in the stock price and investor panic. Century Link’s stock price decreased by over 20% in the middle of February 2013, when the company announced it would cut its upcoming dividend.

Increases and Decreases in the Ratiowe stated earlier that a reduced dividend can raise a red flag; however, a lower dividend payout ratio when compared with the previous year does not necessarily indicate bad news. Several factors both positive and negative can increase or decrease the dividend payout ratio:

Decreases to the Dividend Payout Ratio (DPR):- Flat dividend and an increase in earnings- Decreased dividend and earnings remain unchanged

Increases to the Dividend Payout Ratio (DPR):- Flat dividend and a decrease in earnings- Increased dividend and earnings remain unchanged

ConclusionThe risk of investing in stocks can be reduced by implementing a portfolio that contains both stocks with high dividend payout ratios (dividend stocks) and companies with high retention ratios (growth stocks). By adding diverse industries and international investments, investors can further protect themselves and their portfolios to an even greater extent. Be cautious of companies with extremely high dividend payout ratios, because it can lead to future cash flow problems or excessive debt. In addition, companies with too much retained earnings can soar to record high stock prices, accumulate too much cash and also cause investor concern.

Q 5. Let’s say that Jim's Light Bulbs, a new company, earned $200,000 in its first year of business, but it had to spend $50,000 on the expenses mentioned above. Being a relatively young company, decided to re-invest most of its net income by expanding its production capacity and only paid out $3,750 per quarter in dividends.

Solution.

In this case, the net income for Jim's Light Bulbs would be 200,000 - 50,000 = $150,000


We’ll use 4 times 3,750 =$15,000 as our amount of dividends paid in the first year of business

Find the dividend payout ratio by dividing 15,000 by 150,000, which is 0.10 (or 10%).

Ratio # 3 Price Earnings P/E Ratio

The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market

prospect ratio that calculates the market value of a stock relative to its earnings by

comparing the market price per share by the earnings per share. In other words, the

price earnings ratio shows what the market is willing to pay for a stock based on its

current earnings.

Investors often use this ratio to evaluate what a stock's fair market value should be by

predicting future earnings per share. Companies with higher future earnings are usually

expected to issue higher dividends or have appreciating stock in the future.

Obviously, fair market value of a stock is based on more than just predicted future

earnings. Investor speculation and demand also help increase a share's price over time.

The PE ratio helps investors analyze how much they should pay for a stock based on its

current earnings. This is why the price to earnings ratio is often called a price multiple or

earnings multiple. Investors use this ratio to decide what multiple of earnings a share is

worth. In other words, how many times earnings they are willing to pay.

Formula

The price earnings ratio formula is calculated by dividing the market value price per

share by the earnings per share.


This ratio can be calculated at the end of each quarter when quarterly financial

statements are issued. It is most often calculated at the end of each year with the

annual financial statements. In either case, the fair market value equals the trading

value of the stock at the end of the current period.

The earnings per share ratio is also calculated at the end of the period for each share

outstanding. A trailing PE ratio occurs when the earnings per share is based on

previous period. A leading PE ratios occurs when the EPS calculation is based on future

predicted numbers. A justified PE ratio is calculated by using the dividend discount

analysis.

Analysis

The price to earnings ratio indicates the expected price of a share based on its

earnings. As a company's earnings per share being to rise, so does their market value

per share. A company with a high P/E ratio usually indicated positive future

performance and investors are willing to pay more for this company's shares.

A company with a lower ratio, on the other hand, is usually an indication of poor current

and future performance. This could prove to be a poor investment.

In general a higher ratio means that investors anticipate higher performance and growth

in the future. It also means that companies with losses have poor PE ratios.

An important thing to remember is that this ratio is only useful in comparing like

companies in the same industry. Since this ratio is based on the earnings per share

calculation, management can easily manipulate it with specific accounting techniques.

Q 6.The Island Corporation stock is currently trading at $50 a share and its earnings per share for the year is 5 dollars. Island's P/E ratio would be calculated like this:


Solution:

As you can see, the Island's ratio is 10 times. This means that investors are willing to

pay 10 dollars for every dollar of earnings. In other words, this stock is trading at a

multiple of ten.

Since the current EPS was used in this calculation, this ratio would be considered a

trailing price earnings ratio. If a future predicted EPS was used, it would be considered

a leading price to earnings ratio

Q 7. MacKline Bank recently reported net profits after tax of $1,000 million. It has 2.5

million shares outstanding and pays dividends on preference shares equal to $1 million

per year.

a. Calculate the firm’s earnings per share (EPS).

b. Assuming that the share currently trades at $75.80 per share, determine what the

firm’s dividend yield would be if it paid $10 per share to ordinary shareholders.

c. What would the firm’s dividend payout ratio be if it paid $10 a share in dividends

Solution:

a. Earnings per share (EPS) = Net profits after taxes - Preference dividends Number of ordinary shares outstanding For Mackline Bank:

EPS = $1,000,000,000 - $1,000,000 = $399.6 2,500,000

b. Dividend yield = Cash dividends per share Market price per share

For MacKline Bank: Dividend yield = $10 / $75.80 = 13.19%

c. Dividend payout ratio = Dividends per share EPS

For MacKLine Bank: Dividend payout ratio = $10 / $399.6 = 2.5%


Ratio # 4 Dividend Yield Ratio

The dividend yield is a financial ratio that measures the amount of cash dividends distributed to

common shareholders relative to the market value per share. The dividend yield is used by

investors to show how their investment in stock is generating either cash flows in the form of

dividends or increases in asset value by stock appreciation.

Investors invest their money in stocks to earn a return either by dividends or stock appreciation.

Some companies choose to pay dividends on a regular basis to spur investors' interest. These

shares are often called income stocks. Other companies choose not to issue dividends and

instead reinvest this money in the business. These shares are often called growth stocks.

Investors can use the dividend yield formula to help analyze their return on investment in stocks.

Formula

The dividend yield formula is calculated by dividing the cash dividends per share by the market

value per share.

Cash dividends per share are often reported on the financial statements, but they are also

reported as gross dividends distributed. In this case, you'll have to divide the gross dividends

distributed by the average outstanding common stock during that year.

The shares' market value is usually calculated by looking at the open stock exchange price as

of the last day of the year or period.

Analysis

Investors use the dividend yield formula to compute the cash flow they are getting from their

investment in stocks. In other words, investors want to know how much dividends they are

getting for every dollar that the stock is worth.

http://www.myaccountingcourse.com/accounting-dictionary/financial-statements


A company with a high dividend yield pays its investors a large dividend compared to the fair

market value of the stock. This means the investors are getting highly compensated for their

investments compared with lower dividend yielding stocks.

A high or low dividend yield is relative to the industry of the company. As I mentioned above,

tech companies rarely give dividends at all. So even a small dividend might produce a high

dividend yield ratio for the tech industry. Generally, investors want to see a yield as high as

possible.

Q 8.

Stacy's Bakery is an upscale bakery that sells cupcakes and baked goods in Beverly

Hills. Stacy's is listed on a smaller stock exchange and the current market price per

share is $15. As of last year, Stacy paid $15,000 in dividends with 1,000 shares

outstanding. Stacy's yield is computed like this.

As you can see, Stacy's yield is one dollar. This means that Stacy's investors receive 1 dollar in

dividends for every dollar they have invested in the company. In other words, the investors are

getting a 100 percent return on their investment every year Stacy maintains this dividend level.

Ratio # 5 EBITDA

EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is a

financial calculation that measures a company’s profitability before deductions that are often

considered irrelevant in the decision making process. In other words, it’s the net income of a

company with certain expenses like amortization, depreciation, taxes, and interest added back

into the total. Investors and creditors often use EBITDA to compare big companies that either

have significant amounts of debt or large investments in fixed assets because this measurement

excludes the accounting effects of non-operating expenses like interest and paper expenses like

depreciation. Adding these expenses back into net income allows us to analyze and compare

the true operating cash flows of the businesses.

Formula

http://en.wikipedia.org/wiki/Dividend


The EBITDA formula is calculated by subtracting all expenses except interest, taxes,

depreciation, and amortization from total revenues.

Often the equation is calculated inversely by starting with net income and adding back the ITDA.

Many companies use this measurement to calculate different aspects of their business. For

instance, since it is a non-GAAP calculation, you can pick and choose what expenses are

added back into net income. For example, it’s not uncommon for an investor to want to see how

debt affects a company’s financial position without the distraction of the depreciation expenses.

Thus, the formula can be altered to exclude only taxes and depreciation.

Analysis

EBITDA is a profitability calculation that measures how profitable a company is before paying

interest to creditors, taxes to the government, and taking paper expenses like depreciation and

amortization. This is not a financial ratio. Instead, it’s a calculation of profitability that is

measured in dollars rather than percentages.

Like all profitability measurements, higher numbers are always preferred over lower numbers

because higher numbers indicate the company is more profitable. Thus, an earnings before

ITDA of $10,000 is better than one of $5,000. This means the first company still has $10,000 left

over after all of its operating expenses have been paid to cover the interest and taxes for the

year. In this sense, it’s more of a coverage or liquidity measurement than a profitability

calculation.

Since the earnings before ITDA only computes profits in raw dollar amounts, it is often difficult

for investors and creditors to use this metric to compare different sized companies across an

industry. A ratio is more effective for this type of comparison than a straight calculation.

EBITDA Margin

The EBITDA margin takes the basic profitability formula and turns it into a financial ratio that can

be used to compare all different sized companies across and industry. The EBITDA margin

formula divides the basic earnings before interest, taxes, depreciation, and amortization

equation by the total revenues of the company-- thus, calculating the earnings left over after all


operating expenses (excluding interest, taxes, dep, and amort) are paid as a percentage of total

revenue. Using this formula a large company like Apple could be compared to a new start up in

Silicon Valley.

The basic earnings formula can also be used to compute the enterprise multiple of a company.

The EBITDA multiple ratio is calculated by dividing the enterprise value by the earnings before

ITDA to measure how low or high a company is valued compared with it metrics. For instance a

high ratio would indicate a company might be currently overvalued based on its earnings.

Q 9

Let’s look at an example and calculate both the EBITDA and margin for Jake’s Ski

House. Jake manufactures custom skis for both pro and amateur skiers. At the end of

the year, Jake earned $100,000 in total revenues and had the following expenses.

Salaries: $25,000 Rent: $10,000 Utilities: $4,000 Cost of Goods Sold: $35,000 Interest: $5,000 Depreciation: $15,000 Taxes: $3,000

Jake’s net income at the end of the year equals $3,000. Calculate Jake’s EBITDA

Solution:

http://www.myaccountingcourse.com/accounting-dictionary/net-income


As you can see, the taxes, depreciation and interest are added back into the net income for

the year showing the amount of earnings Jake was able to generate to cover his interest

and tax payments at the end of the year.

If investor or creditors wanted to compare Jake’s Ski shop with another business in the

same industry, they could calculate his margin like this:

The EBITDA margin ratio shows that every dollar Jake generates in revenues results in 26

cents of profits before all taxes and interest is paid. This percentage can be used to

compare Jake’s efficiency and profitability to other companies regardless of size.

Q 10. Calculate EBITDA & EBITDA Margin

Solution: Find the line items for EBIT ($750,000), depreciation ($50,000) and amortization (n/a) and then use the formula above:EBITDA = 750,000 + 50,000 + 0 = $800,000Using this information and the formula above, we can calculate Company XYZ's EBITDA margin as:EBITDA Margin = $800,000/$1,000,000 = 80%

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/amortization-2073

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/depreciation-1328

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/earnings-interest-and-taxes-ebit-550


Because EBITDA is a measure of how much cash came in the door, an EBITDA margin is a measure of how much cash profit a company made in a year.

Q 11

Calculations above use line items and figures from the example income statement

shown here.

Calculate EBITDA and EBITDA Margin

http://www.investinganswers.com/financial-dictionary/businesses-corporations/cash-5011


Formula:EBIT = R - E

EBIT Margin = EBIT / R

Taxable Income = EBIT - I

Tax Amount = Taxable Income x T

Net Income = Taxable Income - Tax Amount

Profit Margin = Net Income / R

Where R = Sales Revenue E = Operating Expenses I = Interest Paid T = Tax Rate

Q12:

A company has sales of $500000 with operating costs of $450000, interest paid of $6000 and a tax rate of 30%. Calculate the EBIT, Net Income, and Profit Margin.

Given:Sales Revenue (R) = $500000 Operating Expenses (E) = $450000 Interest Paid (I) = $6000 Tax Rate (T) = 30% = 0.3To Find:Earnings before Interest and Taxes, Net Income and Profit Margin

Solution:EBIT = R - E = $500000 - $450000) = $50000 EBIT Margin = EBIT / R = ($50000 / $500000) x 100 = 10 % Taxable Income = EBIT - I = $50000 - $6000 = $44000 Tax Amount = Taxable Income x T = $44000 x 0.3 = $13200 Net Income = Taxable Income - Tax Amount = $44000 - $13200 = $30800 Profit Margin = Net Income / R = ($30800 / $500000) x 100 = 6.16 %

Ratio #6 Retention Rate

The retention rate, sometimes called the plowback ratio, is a financial ratio that measures the

amount of earnings or profits that are added to retained earnings at the end of the year. In other

words, the retention rate is the percentage of profits that are withheld by the company and not

distributed as dividends at the end of the year.

This is an important measurement because it shows how much a company is reinvesting in its

operations. Without a steady reinvestment rate, company growth would be completely

dependent on financing from investors and creditors.


In a sense the retention ratio is the opposite of the dividend payout ratio because it shows how

much money the company chooses to keep in its bank account; whereas, the dividend payout

ratio computes the percentage of profits that a company choose to distribute to its shareholders.

The plowback ratio increases retained earnings while the dividend payout ratio decreases

retained earnings.

Formula

The retention rate is calculated by subtracting the dividends distributed during the period from

the net income and dividing the difference by the net income for the year.

The numerator of this equation calculates the earnings that were retained during the period

since all the profits that are not distributed as dividends during the period are kept by the

company. You could simplify the formula by rewriting it as earnings retained during the period

divided by net income.

Analysis

Since companies need to retain some portion of their profits in order to continue to operate and

grow, investors value this ratio to help predict where companies will be in the future. Apple, for

instance, only started paying dividends in the early 2010s. Up until then, the company retained

all of its profits every year.

This is true about most tech companies. They rarely give dividends because they want to

reinvest and continue to grow at a steady rate. The opposite is true about established

companies like GE. GE gives dividends every year to it shareholders.

Higher retention rates are not always considered good for investors because this usually means

the company doesn't give as much dividends. It might mean that the stock is continually

http://en.wikipedia.org/wiki/Dividends

http://www.myaccountingcourse.com/financial-ratios/dividend-payout-ratio


appreciating because of company growth however. This ratio helps illustrate the difference

between a growth stock and an earnings stock.

Q 13

Ted's TV Company earned $100,000 of net income during the year and decided to

distribute $20,000 of dividends to its shareholders. Here is how Ted would calculate his

plowback ratio.

As you can see, Ted's rate of retention is 80 percent. In other words, Ted keeps 80 percent of

his profits in the company. Only 20 percent of his profits are distributed to shareholders.

Depending on his industry this could a standard rate or it could be high.

Ratio #6 Cash Coverage Ratio

The cash coverage ratio is useful for determining the amount of cash available to pay for a

borrower's interest expense, and is expressed as a ratio of the cash available to the amount of

interest to be paid. To show a sufficient ability to pay, the ratio should be substantially greater

than 1:1.

To calculate the cash coverage ratio, take the earnings before interest and taxes (EBIT) from

the income statement, add back to it all non-cash expenses included in EBIT (such as

depreciation and amortization), and divide by the interest expense. The formula is:

Earnings before Interest and Taxes + Non-Cash Expenses

Interest Expense

Q 14.

The controller of the Anderson Boat Company (ABC) is concerned that the company has recently taken on a great deal of debt to pay for a leveraged buyout, and wants to ensure that there is enough cash to pay for its new interest burden. The company is generating earnings before interest and taxes of $1,200,000 and it records annual


depreciation of $800,000. ABC is scheduled to pay $1,500,000 in interest expenses in the coming year. Based on this information, ABC has the following cash coverage ratio:

Solution:

$1,200,000 EBIT + $800,000 Depreciation

$1,500,000 Interest Expense

= 1.33 cash coverage ratio

The calculation reveals that ABC can pay for its interest expense, but has very little cash left

for any other payments.

There may be a number of additional non-cash items to subtract in the numerator of the

formula. For example, there may have been substantial charges in a period to increase

reserves for sales allowances, product returns, bad debts, or inventory obsolescence. If

these non-cash items are substantial, be sure to include them in the calculation. Also the

interest expense in the denominator should only include the actual interest expense to be

paid - if there is a premium or discount to the amount being paid, it is not a cash payment,

and so should not be included in the denominator.

Miscellaneous Questions related to Financial Ratios

Q1.

Gambit Golf’s market-to-book ratio is currently 2.5 times and PE ratio is 6.75 times. If Gambit Golf’s common stock is currently selling at $12.50 per share, what is the book value per share and earnings per share?

Q2.

Leonatti Labs’ year-end price on its common stock is $35. The firm has total assets of $50 million, the debt ratio is 65%, no preferred stock, and there are 3 million shares of common stock outstanding. Calculate the market-to-book ratio for Leonatti Labs.

Q3.

Leonatti Labs’ year-end price on its common stock is $15. The firm has a profit margin of 8%, total assets of $25 million, a total asset turnover ratio of 0.75, no preferred stock, and there are 3 million shares of common stock outstanding. Calculate the PE ratio for Leonatti Labs.

Q4.

Use the following financial statements for Lake of Egypt Marina to answer problems


Lake of Egypt Marina, Inc.

Balance Sheet as of December 31, 2007 and 2008

(in millions of dollars)

Assets 2007 2008 Liabilities & Equity 2007 2008

Current assets: Current liabilities :

Cash and marketable Accrued wages and

securities $ 65 $ 75 taxes $ 43 $ 40

Accounts receivable 110 115 Accounts payable 80 90

Inventory 190 200 Notes payable 70 80

Total $ 365 $ 390 Total $ 193 $ 210

Fixed assets: Long-term debt: $ 280 $ 300

Gross plant and

equipment $ 471 $ 580 Stockholders’ equity:

Less: Depreciation 100 110 Preferred stock (5 million shares) $ 5 $ 5

Net plant and Common stock and

equipment $ 371 $ 470 paid-in surplus 65 65

Other long-term assets 49 50 (65 million shares)

Total $ 420 $ 520 Retained earnings 242 330

Total $ 312 $ 400

Total assets $ 785 $ 910 Total liabilities and equity $ 785 $ 910



Income Statement for Years Ending December 31, 2014 and 2015


2014 2015

Net sales (all credit) $ 432 $ 515

Less: Cost of goods sold 200 260

Gross profits 232 255

Less: Depreciation 20 22

Earnings before interest and taxes (EBIT) 212 233

Less: Interest 30 33

Earnings before taxes (EBT) 182 200

Less: Taxes 55 57

Net income $ 127 $ 143

Less: Preferred stock dividends $ 5 $ 5

Net income available to common stockholders $ 122 $ 138

Less: Common stock dividends $ 65 $ 65

Addition to retained earnings $ 57 $ 73

Per (common) share data:

Earnings per share (EPS) $1.877 $2.123

Dividends per share (DPS) $1.000 $1.000

Book value per share (BV) $4.723 $6.077

Market value (price) per share (MV) $12.550 $14.750


Spreading the Financial Statements Spread the balance sheets and income statements of Lake of Egypt Marina, Inc. for 2014 and 2015.

Spread the balance sheet:


Balance Sheet as of December 31, 2014 and 2015


Assets 2007 2008 Liabilities & Equity 2014 2015

Current assets: Current liabilities:

Cash and marketable Accrued wages and

securities 8.28% 8.24% taxes 5.48% 4.40%

Accounts receivable 14.01 12.64 Accounts payable 10.19 9.89

Inventory 24.21 21.98 Notes payable 8.92 8.79

Total 46.50 42.86 Total 24.59 23.08

Fixed assets: Long-term debt: 35.67 32.97

Gross plant and

equipment 60.00 63.74 Stockholders’ equity:

Less: Depreciation 12.74 12.09 Preferred stock (5 million shares) 0.63 0.55

Net plant and Common stock and

equipment 47.26 51.65 paid-in surplus 8.28 7.14

Other long-term assets 6.24 5.49 (65 million shares)

Total 53.50 57.14 Retained earnings 30.83 36.26

Total 39.74 43.95

Total assets 100.00% 100.00% Total liabilities and equity 100.00% 100.00%


Spreading the income statement:


Income Statement for Years Ending December 31, 2014 and 2015


2014 2015

Net sales (all credit) 100.00% 100.00%

Less: Cost of goods sold 46.30 50.49

Gross profits 53.70 49.51

Less: Depreciation 4.63 4.27

Earnings before interest and taxes (EBIT) 49.07 45.24

Less: Interest 6.94 6.41

Earnings before taxes (EBT) 42.13 38.83

Less: Taxes 12.73 11.07

Net income 29.40% 27.76%

Calculating Ratios Calculate the following ratios for Lake of Egypt Marina, Inc. as of year-end 2015.

a. Dividend payout ratiob. Market-to-book ratioc. PE ratiod. Cash coverage ratio

Solutions:1. Market-to-book ratio = 2.50 = ————————— => Book value per share = $12.50/2.50 = $5.00

Book value per share

$12.50

Price-earnings (PE) ratio = 6.75 times = ————————— => Earnings per share = $12.50/6.75 = $1.85

Earnings per share


2. Debt ratio = .65 = Total debt/$50m. => Total debt = .65 x $50m. = $32.5m.

=> Total equity = $50m. - $32.5m. = $17.5m.

=> Book value of equity = $17.5m./3/m. = $5.83333 per share

=> Market to book ratio = $35/$5.83333 = 6 times

3. Total asset turnover = .75 = Sales/$25m. => Sales = $25m. x .75 = $18.75m.

=> Profit margin = .08 = Net income/$18.75m. => Net income = .08 x $18.75m. = $1.5m

=> EPS = $1.5m./3m. = $0.50 per share

=> PE ratio = $15/$0.50 = 30 times

4.

a. Dividend payout ratio 65/138=47.10% 35%

b. Market-to-book ratio 14.750/6.077=2.43 times 2.55 times

c. PE ratio 14.750/2.123=6.95 times 15.60 times

d. Cash coverage ratio (233+22)/33=7.73 times 8.75 times

Documents

Specific Ratios