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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Enrictio Aquatic Products’ oiler to acquire Fiberglass Products for S2.000,000 cash has been accepted. Enrietto has $1.000,000 of liquid assets that can be converted into cash and plans to either sell common stock or issue bonds to raise the remaining $1.000.000. Before this acquisition. Enrietto’s condensed balance sheet and condensed income statement were as follows:

Chapter 10, Problem 88PSB, Enrictio Aquatic Products oiler to acquire Fiberglass Products for S2.000,000 cash has been

Enrietto’s policy is to pay 60% of net income to stockholders as dividends. Enrietto expects to be able to raise the $1,000,000 it needs for the acquisition by selling 50,000 shares of common stock at $20 each or by issuing $1,000,000 of 20-year, 12% bonds. Enrietto expects income from operations to grow by $700,000 after Fiberglass Products has been acquired. (Interest expense will increase if debt is used to finance the acquisition.)

If Enrietto sells additional stock. What will be the cash outflow for dividends?

To determine

(a)

Introduction:

Analyzing the financial statements allows the stockholders to assess payout. There are four payout ratios i.e. Dividend Yield, Dividend Payout, Stock repurchase Payout and total payout and mainly 2 Stockholder profitability ratios i.e. Return on common equity and earnings per share.

To calculate:

Stockholder payout and profitability ratios.

Explanation

Given:

Stockholders’ equity section of the balance sheet

Stockholder payout ratios:

a. Dividend Yield = Dividend per common shareCommon Stock Price

Dividend Yield = $1.50$58.30

Dividend Yield = 0.0257 or 2.57%

Dividend Payout = Common DividendsNet Income

b. Dividend Payout = $300,000$1,584,000

Dividend Payout = 0.1894 or 18.94%

c. Stock Repurchase Payout = Common Stock RepurchasesNet Income

Stock Repurchase Payout = $850,000$1,584,000

Stock Repurchase Payout = 0.5366 or 53.66%

d. Total Payout = Dividend Payout + Stock Repurchase Payout

Total Payout = 18.94% + 53.66%

Total Payout = 72.6%

Stockholder profitability ratios

a. Return on Common Equity = (Net Income - Preferred Dividends)Average Common stockholders' Equity Outstanding

Wherein,

Average Common Stockholders’ Equity Outstanding = ( 2019 total stockholders’ equity

To determine

(b)

Introduction:

Analyzing the financial statements allows the stockholders to assess payout. There are four payout ratios i.e. Dividend Yield, Dividend Payout, Stock repurchase Payout and total payout and mainly 2 Stockholder profitability ratios i.e. Return on common equity and earnings per share.

To interpret:

The given ratios for year 2019 and current year industry average.

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