Chapter 13, Problem 17PC

Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) return on assets, (b) return on stockholders equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f ) dividend payout ratio. 2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler?

Analyze and compare Zynga, Electronic Arts, and Take-Two Data (in millions) from recent financial statements of Zynga Inc. (ZNGA), Electronic Arts Inc. (EA), and Take-Two Interactive Software, Inc. (TTWO) are as follows: a. Compute the working capital for Year 2 and Year 1 for each company. b. Which company has the largest working capital? c. Compute the current ratio for Year 2 and Year 1 for each company. Round to one decimal place. d. For Year 2, rank the companies from most liquid to least liquid based upon the current ratio.

Lucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the companys just completed financial statements. The following discussion took place between Lucas Hunter and Simmons controller, John Jameson, in January, after the close of the fiscal year: Lucas: Ive been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This wont look good to our shareholders. Is there anything we can do about this? John: What do you mean? The past is the past, and the numbers are in. There isnt much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I dont see much leeway for significant change at this point. Lucas: No, no. Im not suggesting that we cook the books. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good newsand, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. John: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there. Lucas: This is true, but somehow I think this information should be given a much higher profile. I dont like this information being buried in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statementsomeplace under the earnings per share number. In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? John: Ive never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the ideaIll start working on it. Lucas: Glad to be of service. How would you interpret this situation? Is John behaving in an ethical and professional manner?