Chapter 17, Problem 5CP

### Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124

Chapter
Section

### Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124
Textbook Problem
1 views

# Profitability analysisDeere & Company manufactures and distributes farm and construction machinery that it sells around the world. In addition to its manufacturing operations, Deereâ€™s credit division loansÂ money to customers to finance the purchase of their farm and construction equipment.The following information is available for three recent years (in millions except per-share amounts): 1. Calculate the following ratios for each year, rounding ratios and percentages to oneÂ decimal place, except for per-share amounts: a. Return on total assets b. Return on stockholdersâ€™ equity c. Earnings per share d. Dividend yield e. Price-earnings ratio 2. Based on these data, evaluate Deereâ€™s profitability.

To determine

Determine the following ratios for three years:

1. (a) Return on total assets
2. (b) Return on stockholders’ equity
3. (c) Earnings per share
4. (d) Dividend yield
5. (e) Price – earnings ratio
Explanation

a. Return on total assets for three years

RateÂ ofÂ returnÂ onÂ assetsÂ (YearÂ 3)=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets=$3,064.7+$782.8$52,237=7.4% RateÂ ofÂ returnÂ onÂ assetsÂ (YearÂ 2)=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets=$2,799.9+$759.4$45,737=7.8%RateÂ ofÂ returnÂ onÂ assetsÂ (YearÂ 1)=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets=$1,865.0+$811.4$42,200=6.4% Description: Return on assets determines the particular companyâ€™s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets. Formula: RateÂ ofÂ returnÂ onÂ assets=Netâ€‰â€‰incomeÂ +Â InterestÂ expenseAverageÂ totalÂ assets Hence, rate of return on assets for year 3, year 2, and year 1 are 7.4%, 7.8%, and 6.4% respectively. b) Return on stockholdersâ€™ equity for three years Â RateÂ ofÂ returnÂ onÂ stockholders'Â equity(YearÂ 3)}=Â NetÂ incomeÂ AverageÂ stockholderâ€™sÂ equity=â€‰$3,064.7$6,821=44.9% RateÂ ofÂ returnÂ onÂ stockholders'Â equity(YearÂ 2)}=Â NetÂ incomeÂ AverageÂ stockholderâ€™sÂ equity=â€‰$2,799.9$6,545=42.8% RateÂ ofÂ returnÂ onÂ stockholders'Â equity(YearÂ 1)}=Â NetÂ incomeÂ AverageÂ stockholderâ€™sÂ equity=â€‰$1,865.0$5,555=33.6% Description: Rate of return on stockholdersâ€™ equity is used to determine the relationship between the net income and the average common equity that are invested in the company. Formula: RateÂ ofÂ returnÂ onÂ stockholders'Â equtiyÂ =Â NetÂ incomeAverageÂ Â stockholderâ€™sÂ equity Hence, rate of return on stockholdersâ€™ equity for year 3, year 2, and year 1 is 44.9%, 42.8%, and 33.6%. c) Earnings per share on the common stock for three years. EarningsÂ perÂ shareÂ (YearÂ 3)=[NetÂ incomeâˆ’PreferredÂ dividends(WeightedÂ averageÂ sharesÂ ofÂ commonÂ stockÂ outstanding)]=$3,064.7âˆ’$0397â€‰shares=$7.72EarningsÂ perÂ shareÂ (YearÂ 2)=[NetÂ incomeâˆ’PreferredÂ dividends(WeightedÂ averageÂ sharesÂ ofÂ commonÂ stockÂ outstanding)]=\$2,799

2.

To determine

Evaluate D’s profitability.

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