Chapter 10, Problem 10.4APCA

Comparative Analysis

Buckle

American Eagle Outfitters, Inc., vs. The Buckle, Inc.

Financial information for American Eagle is presented in Appendix A at the end of the book, and financial information for Buckle is presented in Appendix B at the end of the book. The stock prices as of February 2, 2013, for American Eagle and Buckle were $20.19 and $47.03, respectively.

Required:

  1.    Calculate the return on equity for American Magic and Buckle in 2013. Which company has a higher return on equity?

  2.    Calculate the return on the market value of equity for American Eagle and Buckle in 2013. Which company has a higher return on the market value of equity?

  3.    Why is the return on the market value of equity for American Eagle and Buckle so much lower than the return on equity?

  4.    Calculate the price-earnings ratio on February 2, 2013, for American Eagle and Buckle. Basic earnings per share are provided for each company near the bottom of the income statement. Which is trading at a lower price per dollar of earnings?

To determine

To calculate: The returns on equity for the year ended January 31, 2015 for Incorporation A and Incorporation B, and determine the company which has a higher return on equity.

Answer to Problem 10.4APCA

Return on equity for the year ended January 31, 2015 for Incorporation A and Incorporation B is 7% and 45.3% respectively. Comparatively Incorporation B has a much higher return on equity than Incorporation A.

Explanation of Solution

Explanation:

Return on equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on equity is as follows:

$\text{Return on equity}=\frac{\text{Net income}}{\text{Average stockholders' equity}}\times 100$

Calculate the return on equity of Incorporation A as follows:

Step 1: Compute the average common stockholders’ equity:

$\begin{array}{c}\text{Average stockholders' equity }=\frac{\left(\begin{array}{l}\text{Beginning}\text{stockholders' equity}\\ +\text{Ending}\text{stockholders' equity}\end{array}\right)}{2}\\ =\frac{\left(\$1,166,178+\$1,139,746\right)}{2}\\ =\$1,152,962\end{array}$ (1)

Step 2: Compute the return on stockholders’ equity:

Net income is $80,322

Average stockholders’ equity is $1,152,962 (1)

$\begin{array}{c}\text{Rate of return equity}=\frac{\text{Net income}}{\text{Average common stockholders' equity}}\times 100\\ =\frac{\$80,322}{\$1,152,962}\times 100\\ =7\%\left(\text{Rounded value}\right)\end{array}$

Therefore, the return on equity of Incorporation A is 7%.

Calculate the return on equity of Incorporation B as follows:

Step 1: Compute the average common stockholders’ equity:

$\begin{array}{c}\text{Average stockholders' equity }=\frac{\left(\begin{array}{l}\text{Beginning}\text{stockholders' equity}\\ +\text{Ending}\text{stockholders' equity}\end{array}\right)}{2}\\ =\frac{\left(\$361,930+\$355,278\right)}{2}\\ =\$358,604\end{array}$ (2)

Step 2: Compute the return on stockholders’ equity:

Net income is $162,564

Average stockholders’ equity is $358,604 (2)

$\begin{array}{c}\text{Rate of return equity}=\frac{\text{Net income}}{\text{Average common stockholders' equity}}\times 100\\ =\frac{\$162,564}{\$358,604}\times 100\\ =45.3\%\left(\text{Rounded value}\right)\end{array}$

Therefore, the return on equity of Incorporation B is 45.3%.

To determine

To calculate: The dividend yield for both Incorporation A and Incorporation B for the year ended January 31, 2015, and determine the company which has a higher dividend yield.

Answer to Problem 10.4APCA

The dividend yield for the year ended January 31, 2015 for Incorporation A and Incorporation B is 3.6% and 7.2% respectively. Comparatively Incorporation B has a much higher dividend yield than Incorporation A.

Explanation of Solution

Explanation:

Dividend yield:

Dividend yield ratio indicates how much percentage of share prices a company pays out in the form of dividends price. The formula to calculate the dividend yield percentage is as follows:

$\text{Dividend yield}=\frac{\text{Dividends per share}}{\text{Stock price}}\times 100$

Calculate the dividend yield for Incorporation A as follows:

$\begin{array}{c}\text{Dividend yield}=\frac{\text{Dividends per share}}{\text{Stock price}}\times 100\\ =\left[\frac{\left(\frac{\text{Dividend}}{\text{Number of shares outstanding}}\right)}{\$50.79}\times 100\right]\\ =\left[\frac{\left(\frac{\text{\$99,585,000}}{\text{194,516,000 shares}}\right)}{\$14.04}\times 100\right]\\ =3.6\%\end{array}$

Hence, the dividend yield of Incorporation A is 3.6%.

Calculate the dividend yield for Incorporation B as follows:

$\begin{array}{c}\text{Dividend yield}=\frac{\text{Dividends per share}}{\text{Stock price}}\times 100\\ =\left[\frac{\left(\frac{\text{Dividend}}{\text{Number of shares outstanding}}\right)}{\$50.79}\times 100\right]\\ =\left[\frac{\left(\frac{\text{\$176,604,000}}{\text{48,379,613 shares}}\right)}{\$50.79}\times 100\right]\\ =7.2\%\end{array}$

Hence, the dividend yield of Incorporation B is 7.2%.

To determine

The price earnings ratio for Incorporation A and Incorporation B for the year ended January 31, 2015, and determine the company which is trading at a lower price per dollar of earnings.

Answer to Problem 10.4APCA

The price earnings ratio for Incorporation A and Incorporation B for the year ended January 31, 2015 is 33.4 and 14.0 respectively. Comparatively Incorporation B is trading at a lower price per dollar of earnings than Incorporation A.

Explanation of Solution

Price-Earnings ratio:

Price-Earnings ratio is a measure of profitability of a firm. In other words, price-earnings ratio shows that how the stock is trading relative to current earnings. The following formula can be used to calculate price-earnings ratio as follows:

$\text{Price-earnings ratio = }\frac{\text{Stock price}}{\text{Earnings per share}}$

Determine the price-earnings ratio for Incorporation A as follows:

$\begin{array}{c}\text{Price-earnings ratio = }\frac{\text{Stock price}}{\text{Earnings per share}}\\ =\frac{\$14.04}{\$0.42}\\ =33.4\end{array}$

Hence, the price-earnings ratio for Incorporation A is 33.4.

Determine the price-earnings ratio for Incorporation B as follows:

$\begin{array}{c}\text{Price-earnings ratio = }\frac{\text{Stock price}}{\text{Earnings per share}}\\ =\frac{\$50.79}{\$3.39}\\ =14.0\end{array}$

Hence, the price-earnings ratio for Incorporation B is 14.0.