Page 724 - Accounting Principles (A Business Perspective)

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dividend rate
Common stock, $10 par value $4,800,000 2,400,000 2,400,000
Retained earnings 384,000 384,000 384,000
Total long-term equity $5,184,000 $5,184,000 $5,184,000
Number of common shares 480,000 240,000 240,000
outstanding
Prince has already consulted two investment advisers. One adviser believes that each of the companies will earn
USD 300,000 per year before interest and taxes. The other adviser believes that each company will earn about USD
960,000 per year before interest and taxes. Prince has asked you to write a report covering these points:

a. Compute each of the following, using the estimates made by the first and second advisers.
(a) Earnings available for common stockholders assuming a 40 per cent tax rate.
(b)EPS of common stock.
(c) Rate of return on total stockholders' equity.
b. Which stock should Prince select if she believes the first adviser?
c. Are the stockholders as a group (common and preferred) better off with or without the use of long-term debt
in the companies?

Annual Report analysis D The following selected financial data excerpted from the annual report of
Appliance Corporation represents the summary information which management presented for interested parties to
review:
Appliance Corporation
Selected Financial Data
(USD thousands except per share data)
2010 2009 2008 2007 2006
Net sales $3,049,524 $3,372,515 $2,987,054 $3,041,223 $2,970,626
Cost of sales 2,250,616 2,496,065 2,262,942 2,339,406 2,254,221
Income taxes 74,800 90,200 38,600 15,900 44,400
Income (loss) from continuing (14,996) 151,137 51,270 (8,254) 79,017
operations
Per cent of income (loss) from
continuing operations to net sales
(0.5%) 4.5% 1.7% (0.3%) 2.7%
Income (loss) from continuing
operations per share $ (0.14) 1.42 0.48 (0.08) $ 0.75
Dividends paid per share 0.515 0.50 0.50 0.50 0.50
Average shares outstanding (in
thousands) 107,062 106,795 106,252 106,077 105,761
Working capital $ 543,431 $ 595,703 $ 406,181 $452,626 $ 509,025
Depreciation of property, plant and
equipment 102,572 110,044 102,459 94,032 83,352
Additions to property, plant and
equipment 152,912 84,136 99,300 129,891 143,372
Total assets 2,125,066 2,504,327 2,469,498 2,501,490 2,535,068
Long-term debt 536,579 663,205 724,65 789,232 809,480
Total debt to capitalization 45.9% 50.7% 60.0% 58.7% 45.9%
Shareowners' equity per share of
common stock $ 6.05 $ 6.82 $ 5.50 $ 9.50
a. As a creditor, what do you believe management's objectives should be? Which of the preceding items of
information would assist a creditor in judging management's performance?
b. As an investor, what do you believe management's objectives should be? Which of the preceding items of

information would assist an investor in judging management's performance?
c. What other information might be considered useful?
Group project E Choose a company the class wants to know more about and obtain its annual report. In
groups of two or three students, calculate either the liquidity, equity, profitability, or market test ratios. Each group

Accounting Principles: A Business Perspective 725 A Global Text