Lesson 27 Flashcards
What are the 3 stockholders’ equity ratios?
- Return on common stockholders’ equity
- payout ratio
- book value per share
What is another name for return on common stockholders’ equity?
return on equity (ROE)
What does return on equity measure?
it measures the profitability form the common stockholders’ viewpoint. It shows how many dollars of net income the company earned for each dollar invested by the owners. It also helps investors judge the worthiness of stock.
What is the return on equity (ROE) ratio formula?
Net income - preferred dividends / average common stockholders’ equity
What does the payout ratio measure?
the percentage of net income a company pays in cash dividends
What is the payout ratio formula?
cash dividends / net income
what does the book value per share of stock mean?
is the amount each share would receive if the company were liquidated on the basis of amount reported on the balance sheet.
What is the book value per share ratio formula?
common stockholders’ equity / outstanding shares
How is the rate of return on common stock equity computed?
Net income less preferred dividends/average common stockholders’ equity
Correct. The Return on Common Stockholders’ Equity is calculated as: (Net Income - Preferred Dividends)/Average Common Stockholders’ Equity.
How is the payout ratio calculated?
Cash dividends/net income less preferred dividends
Correct. The Common Stock Payout Ratio is calculated as Common Stock Cash Dividends divided by Net Income (less preferred dividends, if applicable).
Layne Corporation had the following information in its financial statements for the years ended 2020 and 2021:
Cash dividends for the year 2021: $10,000
Net income for the year ended 2021: $93,000
Market price of stock, 12/31/20: $10
Market price of stock, 12/31/21 $12
Common stockholders’ equity, 12/31/20: $1,600,000
Common stockholders’ equity, 12/31/21: $1,980,000
Outstanding shares, 12/31/21: 160,000
Preferred dividends for the year ended 2021: $15,000
What is the payout ratio for Layne Corporation for the year ended 2021?
0.128
Correct. The Common Stock Payout Ratio is calculated as Common Stock Cash Dividends divided by Net Income (less preferred dividends, if applicable). [$10,000 ÷ ($93,000 – $15,000)] = 12.8%.
