Chapter 13
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216. The following information was obtained from the comparative financial statements included in Arco Inc.’s 2018
annual report. (All amounts are in millions of dollars.)
1. Using the information provided, compute the following for 2018 and 2017:
2. Comment briefly on the company’s solvency.
2. Arco’s debt-to-equity ratio increased during 2018, due to both an increase in the amount of debt outstanding at the end
of 2018 and a decrease in stockholders’ equity. The other three ratios for the two years all indicate that the company is
Chapter 13
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219. The following information is available from the balance sheets at the end of 2018 and 2017 for Kitchen Equipment
Company.
2018 2017
Accounts payable $ 120,000 $ 100,000
Accrued liabilities 35,000 30,000
Taxes payable 40,000 10,000
Short-term notes payable 0 80,000
Bonds payable due within next year 300,000 100,000
Total current liabilities $ 495,000 $ 320,000
Bonds payable $ 600,000 $ 500,000
Common stock, $5 par $ 800,000 $ 800,000
Retained earnings 200,000 100,000
Total stockholders’ equity $1,000,000 $ 900,000
Total liabilities and stockholders’ equity $2,095,000 $1,720,000
Net income for 2018 and 2017 was $120,000 and $460,000, respectively. No stock was issued during either year. Answer
the following:
A) How many shares of stock are outstanding at the end of 2018?
B)
If a company has preferred stock, why are preferred dividends subtracted when computing earnings per share?
C) What is the amount of earnings per share for the year ended December 31, 2018?
D) Explain what information is provided with earnings per share.
Chapter 13
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220. Refer to the data for Knife Corp.
Required
(A) Calculate the dividend yield ratio for 2018 for Knife. Explain.
(B) What factors could have caused the change in the market value of Knife’s stock from 2017 to 2018? Explain.
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223. Refer to the financial information for St. Petersburg Corporation.
Required
(A) Identify the two components of the return on assets ratio for St. Petersburg. Explain the change in the return on assets
ratio during 2018 as it relates to these components.
(B) During 2018, how much is St. Petersburg’s average cost of borrowed capital as compared to the cost of the money
provided by the preferred stockholders? Which is the more profitable? Explain.
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224. Refer to the financial information for St. Petersburg Corporation.
Required
During 2018, has St. Petersburg successfully employed favorable leverage based on the average cost of capital? What
action should the company take?
225. Refer to the financial information for St. Petersburg Corporation.
Required
Calculate the earnings per share for St. Petersburg for 2018 and 2017 assuming an average of 100,000 common shares
were outstanding during 2018 and an average of 80,000 common shares were outstanding during 2017. Explain the
change as it probably relates to the market value of the stock.
226. Starlight Cruises reported net income of $2,880 million for the year ended December 31, 2018. Total stockholders’
equity for the year ended December 31, 2018, was $20,100 million and on December 31, 2017, it was $20,900 million. No
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227. The following selected data are taken from the financial statements of Ulysses Company:
Sales revenue $ 650,000
Cost of goods sold 300,000
Gross profit $ 350,000
Selling and administrative expense 150,000
Operating income $ 200,000
Interest expense 75,000
Income before tax $ 125,000
Income tax expense (40%) 50,000
Net income $ 75,000
1. Compute the following ratios for Ulysses Company:
2. Comment on Ulysses’ use of leverage. Has it successfully employed leverage?
Explain.