Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:

Modern Building Supply Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	67,000	$	147,000
Marketable securities		0		18,000
Accounts receivable, net		475,000		287,000
Inventory		942,000		582,000
Prepaid expenses		16,000		23,000
Total current assets		1,500,000		1,057,000
Plant and equipment, net		1,494,966		1,442,013
Total assets	$	2,994,966	$	2,499,013
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	802,000	$	448,000
Bonds payable, 11%		607,000		607,000
Total liabilities		1,409,000		1,055,000
Stockholders' equity:
Preferred stock, $25 par, 7%		257,500		257,500
Common stock, $10 par		504,000		504,000
Retained earnings		824,466		682,513
Total stockholders' equity		1,585,966		1,444,013
Total liabilities and stockholder's equity	$	2,994,966	$	2,499,013

Modern Building Supply Comparative Income Statement and Reconciliation
		This Year		Last Year
Sales	$	5,009,000	$	4,361,000
Cost of goods sold		3,870,000		3,435,000
Gross margin		1,139,000		926,000
Selling and administrative expenses		646,000		544,000
Net operating income		493,000		382,000
Interest expense		66,770		66,770
Net income before taxes		426,230		315,230
Income taxes (40%)		170,492		126,092
Net income		255,738		189,138
Dividends paid:
Preferred dividends		18,025		18,025
Common dividends		95,760		75,600
Total dividends paid		113,785		93,625
Net income retained		141,953		95,513
Retained earnings, beginning of year		682,513		587,000
Retained earnings, end of year	$	824,466	$	682,513

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:

Current ratio	2.5
Acid-test ratio	1.2
Average collection period	18	days
Average sale period	50	days
Debt-to-equity ratio	0.75
Times interest earned ratio	6.0
Return on total assets	10	%
Price-earnings ratio	9

Assume that you have just inherited several hundred shares of Modern Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited.

Required:
1.	You decide first to assess the well-being of the common stockholders. For both this year and last year, compute the following:

a.	The earnings per share. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

	This year	Last year
Earnings per share	$	$

b.	The dividend yield ratio for common stock. The company’s common stock is currently selling for $34 per share; last year it sold for $29 per share. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Dividend yield ratio	%	%

c.	The dividend payout ratio for common stock. (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Dividend payout ratio	%	%

d.	The price-earnings ratio. How do investors regard Modern Building Supply as compared to other companies in the industry? (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

	This year	Last year
Price-earnings ratio

e.	The book value per share of common stock. Does the difference between market value and book value suggest that the stock at its current price is too high? (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	This year	Last year
Book value per share	$	$

2.	You decide next to assess the company’s rate of return. Compute the following for both this year and last year:

a.	The return on total assets. (Total assets at the beginning of last year were $2,220,000.) (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Return on total assets	%	%

b.	The return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year was $1,259,000.) (Round your answers to 1 decimal place. Omit the "%" sign in your response.)

	This year	Last year
Return on common stockholders' equity	%	%

c.

Is the company’s financial leverage positive or negative?

	Positive
	Negative

Answer rating: 100% (QA)

1 You decide first to assess the well being of the common stock holders For both this year and last year compute the following a The earnings per share Round your answers to 2 decimal places O mit the ... View the full answer