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Tutorial 5

This document provides financial data for Columbia Inc. for 2010 and 2011, including income statements, common stock splits, dividends paid, and year-end market prices. It also provides capital structure and financial data for Company P and Zero Company and asks to calculate various financial metrics like earnings per share, returns, debt ratios, and likelihood of financial distress based on calculated Z-scores.

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Yi Qi
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30 views2 pages

Tutorial 5

This document provides financial data for Columbia Inc. for 2010 and 2011, including income statements, common stock splits, dividends paid, and year-end market prices. It also provides capital structure and financial data for Company P and Zero Company and asks to calculate various financial metrics like earnings per share, returns, debt ratios, and likelihood of financial distress based on calculated Z-scores.

Uploaded by

Yi Qi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Question 1

Columbia Inc. reported the following financial data in its December 31, 2010 report to
shareholders.

Preferred Stock, 8%, $100 Par $ 40,000


Common Stock, $10 par, 20,000 Shares
Issued and Outstanding 200,000
Paid-In Capital in Excess of Par 160,000
Retained Earnings 170,000

In 2011, the firm reported the following (presented in partial form).

Operating income $120,000


Interest expense  30,000
Earnings before tax $ 90,000
Tax  40,000
Net income $ 50,000

On July 15, 2011, the common stock was split 2 for 1. The common stock dividends were
declared and paid as follows.

1st Quarter $0.28


2nd Quarter 0.28
3rd Quarter 0.15
4th Quarter 0.15

The year-end market price for 2011 was $18.00.

Required:
For 2011, compute:
a. earnings per share
b. dividends per share based on ending shares
c. the degree of financial leverage
d. percentage of earnings retained
e. dividend payout
f. dividend yield
g. Price/earnings ratio
h. Book value per share

Question 2
Company P had the following capital structure at year-end after closing.

6% Bonds $10,000,000
3% Preferred Stock 20,000,000
Common Stock ($10 par) 10,000,000
Paid-In Capital in Excess of Par 15,000,000
Retained Earnings 35,000,000

Required:
a. The return on common equity was 9%. Determine the net income assuming common stock
dividends were declared and paid.
b. Using your answer in (a), compute return on investment. Assume that the bond interest is
the only interest expense and the tax rate is 50%. Use year-end balance sheet figures.
c. Compute basic earnings per share. Assume the same number of common shares throughout
the whole year.
d. Compute book value per share.
e. If the market value is $78, compute the price/earnings ratio using your answer to (c).
f. Would you expect the market price to be higher than the book value per share?

Question 3

The following data are presented for Zero Company.

Working capital $ 60,000


Total assets 400,000
Retained earnings 20,000
Earnings before interest and taxes 40,000
Market value of equity 80,000
Book value of total debt 200,000
Sales 300,000

Z score formula:
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
X1 = Working Capital/Total Assets
X2 = Retained Earnings (balance sheet)/Total Assets
X3 = Earnings Before Interest and Taxes/Total Assets
X4 = Market Value of Equity/Book Value of Total Debt
X5 = Sales/Total Assets

Required:
a. Compute the Z score for Zero Company.
b Considering the Altman model, comment on the likelihood that this firm will
. experience financial failure.

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