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Assignment # 4

This document contains 10 problems related to financial statement analysis. The problems involve calculating financial ratios such as degree of financial leverage, earnings per share, dividend payout ratio, and price to earnings ratio. They require analyzing the impacts of events like stock splits, stock issuances, and changes in earnings on various financial metrics. The goal is to evaluate companies' performance and attractiveness to potential investors based on extracted numbers.

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Butt Arham
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188 views

Assignment # 4

This document contains 10 problems related to financial statement analysis. The problems involve calculating financial ratios such as degree of financial leverage, earnings per share, dividend payout ratio, and price to earnings ratio. They require analyzing the impacts of events like stock splits, stock issuances, and changes in earnings on various financial metrics. The goal is to evaluate companies' performance and attractiveness to potential investors based on extracted numbers.

Uploaded by

Butt Arham
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Financial Statement Analysis Shahzad Khuram


0345-4120546
Assignment # 4

Problem # 1
McDonald Company shows the following condensed income statement information for the
current year:

Required: Calculate the degree of financial leverage.

Problem # 2
A firm has earnings before interest and tax of $1,000,000, interest of $200,000, and net income
of $400,000 in Year 1.

Required:
a. Calculate the degree of financial leverage in base Year 1.
b. If earnings before interest and tax increase by 10% in Year 2, what will be the new level of
earnings, assuming the same tax rate as in Year 1?
c. If earnings before interest and tax decrease to $800,000 in Year 2, what will be the new level
of earnings, assuming the same tax rate as in Year 1?

Problem # 3
The following information was in the annual report of Rover Company:
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Financial Statement Analysis Shahzad Khuram
0345-4120546

Required:
a. Based on these data, compute the following for 2009, 2008, and 2007:
1. Percentage of earnings retained
2. Price/earnings ratio
3. Dividend payout
4. Dividend yield
5. Book value per share
b. Discuss your findings from the viewpoint of a potential investor.

Problem # 4
The following data relate to Edger Company:

Note: The stock was selling at 120.5%, 108.0%, and 105.0% of book value in 2009, 2008, and
2007, respectively.

Required:
a. Compute the following for 2009, 2008, and 2007:
1. Percentage of earnings retained
2. Price/earnings ratio
3. Dividend payout
4. Dividend yield
5. Book value per share
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Financial Statement Analysis Shahzad Khuram
0345-4120546
b. Comment on your results from (a). Include in your discussion the data on backlog and new
contracts awarded.

Problem # 5
Dicker Company has the following pattern of financial data for Years 1 and 2:

Required: Calculate earnings per share and comment on the trend.

Problem # 6
Assume the following facts for the current year:
Common shares outstanding on January 1: 50,000 shares
July 1: 2-for-1 stock split
October 1: a stock issue of 10,000 shares

Required: Compute the denominator of the earnings per share computation for the current year.

Problem # 7
NIKE Corporation reported earnings per share of $2.00 in 2008. In 2009, NIKE Corporation
reported earnings per share of $1.50. On July 1, 2009, and December 31, 2009, 2-for-1 stock
splits were declared.
Required: Present the earnings per share for a two-year comparative income statement that
includes 2009 and 2008.

Problem # 8
Cook Company shows the following condensed income statement information for the year
ended December 31, 2009:
Income before extraordinary gain $30,000
Plus: Extraordinary gain, net of tax expense of $2,000 5,000
Net income $35,000
The company declared dividends of $3,000 on preferred stock and $5,000 on common stock. At
the beginning of 2009, 20,000 shares of common stock were outstanding. On July 1, 2009, the
company issued 1,000 additional common shares. The preferred stock is not convertible.

Required:
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Financial Statement Analysis Shahzad Khuram
0345-4120546
a. Compute the earnings per share.
b. How much of the earnings per share appears to be recurring?

Problem # 9
Assume the following facts for the current year:
Net income $200,000
Common dividends $ 20,000
Preferred dividends (The preferred stock is not convertible.) $ 10,000
Common shares outstanding on January 1 20,000 shares
Common stock issued on July 1 5,000 shares
2-for-1 stock split on December 31

Required:
a. Compute the earnings per share for the current year.
b. Earnings per share in the prior year was $8.00. Use the earnings per share computed in (a) and
present a two-year earnings per share comparison for the current year and the prior year.

Problem # 10
Smith and Jones, Inc. is primarily engaged in the worldwide production, processing, distribution,
and marketing of food products. The following information is from its 2009 annual report:

Required:
a. Based on these data, compute the following for 2009 and 2008:
1. Percentage of earnings retained
2. Price/earnings ratio
3. Dividend payout
4. Dividend yield
5. Book value per share
b. Discuss your findings from the viewpoint of a potential investor.

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