287
PROBLEM 9-9
a.
Numerator
Denominator
Net income
200,000
Preferred dividends
(10,000)
Common shares outstanding on
January 1
20,000
shares
Common stock issue on July 1,
5,000 shares
2,500
(5,000 x ½)
Weighted average
22,500
Two-for-one stock split on
December 31
2
(a)
190,000
(b)
45,000
shares
Earnings per share (a) ÷ (b) $4.27
b.
Current Year
Prior Year
Earnings per share reported
for the prior year
$8.00
Two-for-one stock split on
December 31 of the current year
($8.00 x 0.5) = $4.00
$4.00
Earnings per share computed
in (a) for the current year
$4.27
PROBLEM 9-10
a.
1.
Percentage of Earnings Retained
=
Net Income – All Dividends
Net Income
2011
2010
Cash dividends
$0.80 x 25,380,000
$0.76 x 25,316,000
$20,304,000
$19,240,160
Preferred dividends
4,567,000
930,000
Total dividends
24,871,000
20,170,160
Net income (B)
32,094,000
31,049,000
Net income – dividends (A)
7,223,000
10,878,840
Percentage of earnings
retained (A) ÷ (B)
22.51%
35.04%
288
2.
Price/Earnings Ratio
=
Market Price
Fully Diluted Earnings Per Share
2011
2010
$12.94
$15.19
$1.08
$1.14
= 11.98%
= 13.32%
3.
Dividend Payout
=
Dividends Per Share
Fully Diluted Earnings Per Share
2011
2010
$0.80
$0.76
$1.08
$1.14
= 74.07%
= 66.67%
4.
Dividend Yield
=
Dividends Per Share
Market Price Per Share
2011
2010
$0.80
$0.76
$12.94
$15.19
= 6.18%
= 5.00%
5.
Book Value Per Share
=
Common Equity
Shares Outstanding
2011
2010
Total assets
1,264,086,000
$
1,173,924,000
Less: total liabilities
(823,758,000)
(742,499,000)
Less: nonredeemable preferred stock
(16,600,000)
(16,600,000)
Common equity (A)
423,728,000
$
414,825,000
Shares outstanding
25,380,000
+
25,316,000
Book value per share (A) ÷ (B)
$16.70
$16.39
289
b. Having the percentage of earnings retained decline provides mixed feelings. It
The price/earnings ratio has declined as a result of the drop in price. This decline
Dividend yield is up, caused by the rise in dividends and more so by the drop in
price.
a good security.
PROBLEM 9-11
a. The major advantage of receiving stock appreciation rights instead of stock options
b. The related credit is to a liability under the stock appreciation plan that would
probably be classified as long-term, since exercise cannot occur until 2014.
c. In 2014, the company must pay off the liability related to the appreciation in cash.
PROBLEM 9-12
a.
3
Common shareholders’ equity divided by the number of common chares
outstanding gives book value per share.
Book Value Per Share
=
Total Stockholders’ Equity –
Preferred Stock (At Liquidation)
b.
2
Number of Common Shares Outstanding
$1,000,000 + $1,500,000 + $500,000 + $1,100,000
=
$12.67
150,000 Shares
290
PROBLEM 9-13
a.
1.
Degree of Financial Leverage
=
Earnings Before Interest, Tax, Noncontrolling
Interest, Equity Income, and Nonrecurring Items
Earnings Before Tax, Noncontrolling Interest,
Equity Income, and Nonrecurring Items
2011:
$110,500 + $9,500
=
1.09
$110,500
2010:
$107,700 + $6,600
=
1.06
$107,700
2009:
$100,450 + $6,800
=
1.07
$100,450
2008:
$124,100 + $6,900
=
1.06
$124,100
2007:
$119,000 + $7,000
=
1.06
$119,000
2.
Earnings Per Common Share
2011:
Continuing operations
$
2.67
*
Extraordinary gain
.69
$
3.36
* Should be used in primary analysis.
2010:
$2.57
2009:
$2.36
2008:
$3.23
2007:
$2.81
291
3.
Price/Earnings Ratio
=
Market Price Per Share
Earnings Per Share
2011:
$24.00
=
8.99
$2.67
2010:
$22.00
=
8.56
$2.57
2009:
$21.00
=
8.90
$2.36
2008:
$37.00
=
11.46
$3.23
2007:
$29.00
=
10.32
$2.81
4.
Percentage of Earnings Retained
=
Net Income – All Dividends
Net Income
2011:
$97,500 – $3,920 – $91,640
=
1.99%
$97,500
2010:
$74,400 – $6,100 – $66,410
=
2.54%
$74,400
2009:
$68,350 – $6,400 – $60,900
=
1.54%
$68,350
2008:
$93,700 – $6,600 – $84,970
=
2.27%
$93,700
2007:
$81,600 – $6,000 – $81,200
=
(6.86%)
$81,600
292
5.
Dividend Payout
=
Dividends Per Common Share
Fully Diluted Earnings Per Share
2011:
$3.16
=
118.35%
$2.67
2010:
$2.29
=
89.11%
$2.57
2009:
$2.10
=
88.98%
$2.36
2008:
$2.93
=
90.71%
$3.23
2007:
$2.80
=
99.64%
$2.81
6.
Dividend Yield
=
Dividends Per Common Share
Market Price Per Common Share
2011:
$3.16
=
13.17%
$24.00
2010:
$2.29
=
10.41%
$22.00
2009:
$2.10
=
10.00%
$21.00
2008:
$2.93
=
7.92%
$37.00
2007:
$2.80
=
9.66%
$29.00
293
7.
Book Value Per Share
=
Total Stockholders’ Equity – Preferred Stock Equity
Number of Common Shares Outstanding
2011:
$489,000 – $49,000
=
$15.17
29,000
2010:
$514,000 – $76,000
=
$15.10
29,000
2009:
$516,000 – $80,000
=
$15.03
29,000
2008:
$517,000 – $82,000
=
$15.00
29,000
2007:
$508,000 – $75,000
=
$14.93
29,000
8.
Materiality of Options
=
Stock Options Outstanding
Number of Shares of Common Stock Outstanding
2007 – 2011:
$1,000,000
=
3.45%
29,000,000
Earnings from continuing operations and the price/earnings ratio have been
relatively stable.
Options outstanding appear to be immaterial.
294
PROBLEM 9-14
a.
3
2011
2010
2009
EPS previously reported
—–
$1.00
$.80
2011 declared a 4-for-1 stock split
.25
.20
2011 reported .30 EPS
.30
.25
.20
b.
4
New EBIT
$
2,000,000
Prior EBIT
1,000,000
(a)
$
1,000,000
Financial leverage (b)
1.5
(a) x (b)
$
1,500,000
c.
4
Adjust the shares in 2011 by adding 10% additional shares. Divide the
previous number of shares for 2011 by the new number of shares. This
is the percentage of the previous reported earnings per share that should
be reported as the adjusted earnings per share. For illustration, assume
the following;
(A)
Previous shares
100,000
10% stock dividend
10,000
(B)
New number of shares
110,000
(A) ÷ (B)
100,000/110,000
= .909
d.
3
The price/earnings ratio usually reflects investor’s opinions of the future
prospects for the firm.
e.
4
Degree of financial leverage gives a perspective on risk in the capital
structure.
f.
3
The earnings per share ratio is computed for common stock.
g.
2
Increasing financial leverage can be a risky strategy from the viewpoint of
stockholders of companies having low and falling profits.
h.
1
10% x 1.3 = 13%
i.
2
Dividend yield represents dividends per common share in relation to
market price per common share.
j.
5
Book value per share may not approximate market value per share
because of all of the reasons listed.
295
CASES
CASE 9-1 FOREST PRODUCTS
a. 1. 535,975,518
outstanding during the period).
4. 321,096,000 (Diluted earnings per share is computed by dividing net income less
preferred dividends by the weighted average number of shares of common stock
outstanding plus the dilutive effect by potentially dilutive securities).
continuing operations.
c. Book value =
Total Shareholders’ Equity – Preferred Stock Equity
Number of Common Shares Outstanding
$4,614,000,000
=
$8.61
$535,975,518
296
CASE 9-2 INTEGRATED ELECTRONICS
a. September 27, 2008
Loss from Continuing Operations
1. October 2, 2010 Statements
2. October 3, 2009 Statements
3. September 27, 2008 Statements
(in thousands)
increase in October 2, 2010 statements.
b. September 27, 2008
Diluted earnings (loss) per share from continuing operations
1. October 2, 2010 Statements
2. October 3, 2009 statements
3. September 27, 2008 Statements
Reverse stock split. On July 20, 2009, the Board of Directors of the Company
authorized a reverse split of its common stock at a ratio of one for six, effective
August 14, 2009.
Amount reported September 27, 2008
$(0.96)
Reverse stock split
6
$(5.76)