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Demonstration Problem

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  1. Accounting What the Numbers Mean 9e Demonstration Problem Chapter 11 – Problem 9 Ratio Analysis – Comprehensive Problem

  2. Problem Definition • Presented below are summarized data from the balance sheet and income statement of Wiper, Inc.: Wiper, Inc. Condensed Balance Sheets December 31, 2011, 2010, and 2009 2011 2010 2009 Current assets . . . . . . . . . . . . . $ 677 $ 891 $ 736 Other assets. . . . . . . . . . . . . . . 2,413 1,920 1,719 $3,090 $2,811 $2,455 Current liabilities . . . . . . . . . . . . $ 562 $ 803 $ 710 Other liabilities. . . . . . . . . . . . . . 1,521 982 827 Owners’ equity. . . . . . . . . . . . . . . 1,007 1,026 918 $3,090 $2,811 $2,455

  3. Problem Definition Wiper, Inc. Selected Income Statement Data and Other Data For the Years Ended December 31, 2011 and 2010 (in millions) Income statement data: 2011 2010 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,050 $2,913 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 296 310 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 84 65 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 187 Other data: Average number of common shares outstanding. . 41.3 46.7 Total dividends paid . . . . . . . . . . . . . . . . . . . . . . . $ 50.0 $ 52.3

  4. Problem Definition • Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation. • Calculate return on equity for 2011 and 2010. • Calculate working capital and the current ratio for each of the past three years. • Calculate earnings per share for 2011 and 2010. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2011, what was the market price of the stock? f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.

  5. Problem Definition • Calculate the dividend payout ratio for 2011. • Assume that accounts receivable at December 31, 2011, totaled $309 million. Calculate the number of days’ sales in receivables at that date. • Calculate Wiper’s debt ratio and debt/equity ratio at December 31, 2011 and 2010. • Calculate the times interest earned factor for 2011 and 2010. • Review the results of these calculations, evaluate the profitability and liquidity of this company, and state your opinion about its suitability as an investment for a young, single professional with funds to invest in common stock.

  6. Problem Definition a. ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  7. Problem Definition a. 2011 ROI = ROI = Margin x Turnover Net income Net income. Sales Average total assets Sales Average total assets

  8. Problem Definition a. 2011 ROI = ($192 / $3,050) ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  9. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  10. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  11. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  12. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2010 ROI = ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  13. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2010 ROI = ($187 / $2,913) ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  14. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2010 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  15. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2010 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  16. Problem Definition a. 2011 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)] = 6.3% margin * 1.034 turnover = 6.5% ROI 2010 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)] = 6.4% margin * 1.106 turnover = 7.1% ROI ROI = Margin x Turnover Net income Net income Sales Average total assets Sales Average total assets

  17. Problem Definition • Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation. • Calculate return on equity for 2011 and 2010. • Calculate working capital and the current ratio for each of the past three years. • Calculate earnings per share for 2011 and 2010. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2011, what was the market price of the stock? f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.

  18. Problem Definition b. ROE = Net income / Average owners’ equity

  19. Problem Definition b. 2011 ROE = ROE = Net income / Average owners’ equity

  20. Problem Definition b. 2011 ROE = $192 ROE = Net income / Average owners’ equity

  21. Problem Definition b. 2011 ROE = $192 / (($1,007 + $1,026) / 2) ROE = Net income / Average owners’ equity

  22. Problem Definition b. 2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9% ROE = Net income / Average owners’ equity

  23. Problem Definition b. 2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9% 2010 ROE = ROE = Net income / Average owners’ equity

  24. Problem Definition b. 2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9% 2010 ROE = $187 ROE = Net income / Average owners’ equity

  25. Problem Definition b. 2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9% 2010 ROE = $187 / (($1,026 + $918) / 2) ROE = Net income / Average owners’ equity

  26. Problem Definition b. 2011 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9% 2010 ROE = $187 / (($1,026 + $918) / 2) = 19.2% ROE = Net income / Average owners’ equity

  27. Problem Definition • Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation. • Calculate return on equity for 2011 and 2010. • Calculate working capital and the current ratio for each of the past three years. • Calculate earnings per share for 2011 and 2010. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2011, what was the market price of the stock? f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.

  28. Problem Solution c. 2011 2010 2009 Current assets . . . . . . . . . . . . . $677 $891 $736

  29. Problem Solution c. 2011 2010 2009 Current assets . . . . . . . . . . . . . $677 $891 $736 Current liabilities . . . . . . . . . . (562) (803) (710)

  30. Problem Solution c. 2011 2010 2009 Current assets . . . . . . . . . . . . . $677 $891 $736 Current liabilities . . . . . . . . . . (562) (803) (710) Working capital (CA –CL) . . . $115 $ 88 $ 26

  31. Problem Solution c. 2011 2010 2009 Current assets . . . . . . . . . . . . . $677 $891 $736 Current liabilities . . . . . . . . . . (562) (803) (710) Working capital (CA –CL) . . . $115 $ 88 $ 26 Current ratio (CA / CL) . . . . . 1.2 1.1 1.0

  32. Problem Definition • Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation. • Calculate return on equity for 2011 and 2010. • Calculate working capital and the current ratio for each of the past three years. • Calculate earnings per share for 2011 and 2010. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2011, what was the market price of the stock? f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.

  33. Problem Definition d. EPS = Net income / Weighted average number of shares outstanding

  34. Problem Definition d. 2011 EPS = EPS = Net income / Weighted average number of shares outstanding

  35. Problem Definition d. 2011 EPS = $192 EPS = Net income / Weighted average number of shares outstanding

  36. Problem Definition d. 2011 EPS = $192 / 41.3 EPS = Net income / Weighted average number of shares outstanding

  37. Problem Definition d. 2011 EPS = $192 / 41.3 = $4.65 EPS = Net income / Weighted average number of shares outstanding

  38. Problem Definition d. 2011 EPS = $192 / 41.3 = $4.65 2010 EPS = EPS = Net income / Weighted average number of shares outstanding

  39. Problem Definition d. 2011 EPS = $192 / 41.3 = $4.65 2010 EPS = $187 EPS = Net income / Weighted average number of shares outstanding

  40. Problem Definition d. 2011 EPS = $192 / 41.3 = $4.65 2010 EPS = $187 / 46.7 EPS = Net income / Weighted average number of shares outstanding

  41. Problem Definition d. 2011 EPS = $192 / 41.3 = $4.65 2010 EPS = $187 / 46.7 = $4.00 EPS = Net income / Weighted average number of shares outstanding

  42. Problem Definition • Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation. • Calculate return on equity for 2011 and 2010. • Calculate working capital and the current ratio for each of the past three years. • Calculate earnings per share for 2011 and 2010. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2011, what was the market price of the stock? f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.

  43. Problem Definition e. Price/Earnings Ratio = Market Price / Earnings Per Share

  44. Problem Definition e. 13 = Price/Earnings Ratio = Market Price / Earnings Per Share

  45. Problem Definition e. 13 = $??? Price/Earnings Ratio = Market Price / Earnings Per Share

  46. Problem Definition e. 13 = $??? / $4.65 Price/Earnings Ratio = Market Price / Earnings Per Share

  47. Problem Definition e. 13 = $??? / $4.65 Market price = Price/Earnings Ratio = Market Price / Earnings Per Share

  48. Problem Definition e. 13 = $??? / $4.65 Market price = $60.45 Price/Earnings Ratio = Market Price / Earnings Per Share

  49. Problem Definition • Calculate return on investment, based on net income and average total assets, for 2011 and 2010. Show both margin and turnover in your calculation. • Calculate return on equity for 2011 and 2010. • Calculate working capital and the current ratio for each of the past three years. • Calculate earnings per share for 2011 and 2010. e. If Wiper’s stock had a price/earnings ratio of 13 at the end of 2011, what was the market price of the stock? f. Calculate the cash dividend per share for 2011 and the dividend yield based on the market price calculated in part e.

  50. Problem Definition f. Cash dividends per share = Total cash dividends / Weighted average shares outstanding