Question

Condensed balance sheet and income statement data for Pronghorn Corporation are presented here.

Pronghorn Corporation
Balance Sheets
December 31
2020 2019 2018
Cash $ 32,000 $ 22,000 $20,000
Accounts receivable (net) 52,000 47,000 50,000
Other current assets 94,000 99,000 68,000
Investments 59,000 74,000 49,000
Plant and equipment (net) 500,000 370,000 358,000
Current liabilities $ 87,000 $ 82,000 $ 72,000
Long-term debt 149,000 89,000 54,000
Common stock, $10 par 324,000 314,000 304,000
Retained earnings 177,000 127,000 115,000
$737,000 $612,000 $545,000

Pronghorn Corporation
Income Statements
For the Years Ended December 31
2020 2019
Sales revenue $744,000 $604,000
Less: Sales returns and allowances 42,000 32,000
Net sales 702,000 572,000
Cost of goods sold 429,000 354,000
Gross profit 273,000 218,000
Operating expenses 182,000 152,000
(including income taxes)
Net income $ 91,000 $ 66,000
Additional information:
1. The market price of Pronghorn’s common stock was $7.00, $7.50, and $8.50 for 2018, 2019, and 2020, respectively.
2. You must compute dividends paid. All dividends were paid in cash.
Compute the following ratios for 2016 and 2017, (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%.)
2017 2016
Profit margin
Gross profit rate
Asset turnover
Earnings per share
Price-earnings ratio
Payout ratio
Debt to assets ratio

Answer 1

Dividend paid

2020 Dividend paid = $41,000

2019 Dividend paid = $54,000

a. Profit margin

2020 Profit margin = 12.96%

2019 Profit margin = 11.54%

b. Gross profit rate

2020 Gross profit rate = 38.89%

2019 Gross profit rate = 38.11%

c. Asset turnover

2020 Asset turnover = 1.04 times

2019 Asset turnover = 0.99 times

d. Earnings per share

2020 Earnings per share = $2.81

2019 Earnings per share = $2.10

e. Price-earnings ratio

2020 Price earnings ratio = $3.02

2019 Price earnings ratio = $3.57

f. Payout ratio

2020 Payout ratio = 45.05%

2019 Payout ratio = 81.82%

g. Debt to assets ratio

2020 Debt to assets ratio = 32.02%

2019 Debt to assets ratio = 27.94%

Step-by-step explanation:

Note: We first calculate dividend paid as required as follows:

Dividend paid = Beginning retained earnings + Net income - Ending retained earnings

Therefore, we have:

2020 Dividend paid = $127,000 + $91,000 - $177,000 = $41,000

2019 Dividend paid = $115,000 + $66,000 - $127,000 = $54,000

We can now proceed as follows:

a. Profit margin

This can be calculated using the following formula:

Profit margin = Net income / Net sales

Therefore, we have:

2020 Profit margin = ($91,000 / $702,000) * 100 = 0.12962962962963 * 100 = 12.96%

2019 Profit margin = ($66,000 / $572,000) * 100 = 0.115384615384615 * 100 = 11.54%

b. Gross profit rate

This can be calculated using the following formula:

Gross profit rate = Gross profit / Net sales

Therefore, we have:

2020 Gross profit rate = ($273,000 / $702,000) * 100 = 0.388888888888889 * 100 = 38.89%

2019 Gross profit rate = ($218,000 / $572,000) * 100 = 0.381118881118881 * 100 = 38.11%

c. Asset turnover

This can be calculated using the following formula:

Asset turnover = Net sales / Average total asset = Net sales / ((Ending total assets + Beginning total assets) / 2)

Therefore, we have:

2020 Asset turnover = $702,000 / (($737,000 + $612,000) / 2) = $702,000 / ($1,349,000 / 2) = $702,000 / $674,500 = 1.0407709414381 times = 1.04 times

2019 Asset turnover = $572,000 / (($612,000 + $545,000) / 2) = $572,000 / ($1,157,000/ 2) = $572,000 / $578,500 = 0.98876404494382 times = 0.99 times

d. Earnings per share

This can be calculated using the following formula:

Earnings per share = Net income / outstanding shares = Net income / (Common stock / Price per share)

Therefore, we have:

2020 Earnings per share = $91,000 / (324,000 / 10) = $91,000 / 32,400 = $2.80864197530864 = $2.81

2019 Earnings per share = $66,000 / (314,000 / 10) = $66,000 / 31,400 = $2.10191082802548 = $2.10

e. Price-earnings ratio

This can be calculated using the following formula:

Price earnings ratio = Market value per share / Earnings per share

Therefore, we have:

2020 Price earnings ratio = $8.50 / $2.81 = $3.02491103202847 = $3.02

2019 Price earnings ratio = $7.50 / $2.10 = $3.57142857142857 = $3.57

f. Payout ratio

This can be calculated using the following formula:

Payout ratio = Dividend paid / Net income

Therefore, we have:

2020 Payout ratio = $41,000 / $91,000 = 0.450549450549451 = 45.05%

2019 Payout ratio = $54,000 / $66,000 = 0.818181818181818 = 81.82%

g. Debt to assets ratio

This can be calculated using the following formula:

Debt to assets ratio = Total liabilities / Total assets

Total liabilities = Current liabilities + Long-term debt

2020 Total liabilities = $87,000 + $149,000 = $236,000

2019 Total liabilities = $82,000 + $89,000 = $171,000

2020 Total assets = $737,000

2019 Total assets = $612,000

Therefore, we have:

2020 Debt to assets ratio = $236,000 / $737,000 = 0.320217096336499 = 32.02%

2019 Debt to assets ratio = $171,000 / $612,000 = 0.279411764705882 = 27.94%