Stockholders’ Equity Ratio | Book Value Per Share | EPS | DPS | ROA
Arjun EP
Analyzing the Management of Shareholders’ Equity
The company prepares financial statements for its users.
There are different types of user like management, shareholder, investors, creditors, financial institutions etc.
They analyze for their own purpose.
After analyzing financial statements of a company, they take decision.
For decision making, ratio analysis is the most important tools.
Managements of the company also use different types of ratios to analyze.
They use these ratios to analyses the performance of the company.
Question: Suppose you have $10,000 to invest.
On the basis of financial statement, would you buy stocks (shares) of the firm? What other information would you required before making final decision.
Answer: There are different points of views to buy stocks (shares) of a company.
Out of them, some important factors are explained below:
Note: we should find out ratios which are explained and solved below.
Ratios Relating to Stockholders’ Equity and Dividend
Managements of the company use different types of ratios.
They use these ratios to analyses the performance of the company.
Some of important ratios related to management are explained and solved.
According to syllabus, these ratios are calculated:
(1) Return on assets
(2) Return on equity
(3) Earnings per share
(4) Dividend per share
(5) Dividend payout ratio
(6) Book value per share
(7) Price earnings ratio
(8) Market value per share
Return on Assets
It is also called profit to assets ratio.
Return is net profit after tax.
Company invests on assets to generate profit.
This ratio shows how efficiently management has utilized the total assets of the company.
Higher percentage efficiently used resources and vice versa.
Formula of return of capital employed
|
Return on assets |
= |
(Net profit after tax ÷ Total assets) x 100 |
|
Or |
= |
(Net profit after tax ÷ Average total assets) x 100 |
Where:
Average total assets = (opening assets + closing assets) ÷ 2
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8A
Following information is available: ($/₹/Rs)
|
Net profit after tax |
3,00,000 |
|
Interest on loan |
60,000 |
|
Fixed assets |
12,00,000 |
|
Current assets |
4,00,000 |
Required: Return on assets
[Answer: ROA = 22.5%]
SOLUTION:
Given and working note:
Total assets = fixed assets + current assets = 12,00,000 + 4,00,000 = $16,00,000
Return on assets (ROA)
= (Net profit after tax ÷ Total assets) x 100
= (3,00,000 ÷ 16,00,000) x 100
= 0.1875 x 100
= 18.75%
Alternatively,
Return on assets (ROA)
= (Net profit after tax ÷ Total assets) x 100
= [(3,00,000 + 60,000) ÷ 16,00,000] x 100
= 0.2250 x 100
= 22.50%
Return on Equity | Return on Stockholders’ Equity | Return on Shareholders’ Equity
Return is net profit after tax and stockholders are permanent investor of the company.
This ratio shows how to measure the return on stockholder’s investment.
It is most common ratio for fund measurement.
Common stockholders get remaining profit after charging outsider claim, preferred dividend and reserve.
Higher percentage is better to company.
Formula of return on shareholder’s equity
|
Return on stockholder’s equity (ROSE) |
= (NPAT ÷ Stockholders equity) x 100 |
|
Return on common stockholder fund (ROCSE) |
= (NPAT – Preference dividend ÷ Common stockholders fund) x 100 |
Where:
Only common stockholders fund = shareholders equity – preference shares
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8B
Following information is given by MC Company Ltd:
|
Equity shares of $100 |
12,00,000 |
|
10% Preference shares |
8,00,000 |
|
Reserve and surplus |
220,000 |
|
Net profit after tax |
3,20,000 |
|
Preliminary expenses |
20,000 |
|
|
|
Required: (a) Return on stockholder equity (ROSE); (b) Return on common stockholder fund
[Answer: ROSE = 14.55%; ROCSF = 17.14%]
SOLUTION:
Given and working note:
|
Stockholders’ equity |
Amount |
|
Common stockholders fund (CESF): |
|
Common stock |
12,00,000 |
|
= Stockholders equity – Preferred stock |
|
Preferred stock |
8,00,000 |
|
= 22,00,000 – 8,00,000 |
|
Reserve and surplus |
2,20,000 |
|
= 14,00,000 |
|
Less: Preliminary expenses |
(20,000 |
|
|
|
|
22,00,000 |
|
|
Preferred dividend (PD) = 800,000@10% = 80,000
Return on stockholders’ equity (ROSE)
= (NPAT ÷ Stockholders equity) x 100
= (320,000 ÷ 22,00,000) x 100
= 0.1455 x 100
= 14.55%
Return on common stockholder fund (ROCSF)
= [(NPAT – PD) ÷ Common stockholders fund] x 100
= [(320,000 – 80,000) ÷ 14,00,000] x 100
= [240,000 ÷ 14,00,000] x 100
= 0.1091 x 100
= 17.14%
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Accounts: Class 11 |
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Adjustment in Final Accounts |
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Capital and Revenue |
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Single Entry System |
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Non-Trading Concern |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Earnings per Share
It measures the profit available to common stockholders on per share basis.
This ratio expresses the earning power of the company based equity shareholder viz how much amount can be paid as dividend.
More value per share is better for company.
Formula of earning per share
|
Earnings per share (EPS) |
= |
[(NPAT – Preference dividend) ÷ No. of equity shares] |
|
Or |
= |
(Earnings available to common stockholders ÷ No. equity shares) |
Income Statement
|
Particulars |
Amount |
|
Earnings before interest and tax (EBIT) |
xxxx |
|
Less: Interest on loan |
xxxx |
|
Earnings after tax (EBT) |
xxxx |
|
Less: Tax |
xxxx |
|
Earnings after tax (EAT) |
xxxx |
|
Less: Preference dividend (PD) |
xxxx |
|
Earnings available to equity shareholder |
xxxx |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8C
Following extracted data is available: ($/₹/Rs):
|
Earnings before interest and tax |
9,80,000 |
|
|
20,000 Common stocks of $100 |
20,00,000 |
|
|
10% Preferred stock |
10,00,000 |
|
|
12% Bond (Debentures) |
15,00,000 |
|
The company pays 40% tax to the government.
Required: (a) Profit available to common stockholders; (b) Earnings per share (EPS)
[Answer: Profit = $380,000; EPS = $19]
SOLUTION:
Income Statement
|
Particulars |
Amount |
|
Earnings before interest and tax (EBIT) |
980,000 |
|
Less: Interest on loan (15,00,000@12%) |
180,000 |
|
Earnings after tax (EBT) |
800,000 |
|
Less: Tax (800,000@40%) |
320,000 |
|
Earnings after tax (EAT) |
480,000 |
|
Less: Preference dividend (10,00,000@10%) |
100,000 |
|
Earnings available to equity shareholder |
380,000 |
Earnings per share (EPS)
= Earnings available to common stockholders ÷ No. common stocks
= 380,000 ÷ 20,000 shares
= $19
Dividend per Share
Net profit after tax (NPAT) belongs to shareholder.
The net profit after preference dividend is earning available to equity shareholder.
Generally, the company transfers some amount to reserve fund from profit.
Then available earning distributed to as dividend to equity shareholder.
Formula of dividend per share
Dividend per share (DPS) = Dividend available to shareholders ÷ No. of equity shares
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8D
Following extracted data is given by XYZ Company: ($/₹/Rs)
|
Earnings before interest and tax |
26,60,000 |
|
|
30,000 equity shares of $100 |
30,00,000 |
|
|
8% Preference shares |
20,00,000 |
|
|
10% Long-term debt (debentures) |
9,00,000 |
|
The company pays 50% tax to the government.
Proposed dividend 60% of EPS
Required: (1) Income statement; (2) Earnings per share (EPS); (3) Earnings per share (DPS)
[Answer: Profit = $11,25,000; EPS = $37.50; DPS = $22]
SOLUTION:
Income Statement
|
Particulars |
Amount |
|
Earnings before interest and tax (EBIT) |
26,60,000 |
|
Less: Interest on loan (9,00,000@10%) |
90,000 |
|
Earnings after tax (EBT) |
25,70,000 |
|
Less: Tax (25,70,000@50%) |
12,85,000 |
|
Earnings after tax (EAT) |
12,85,000 |
|
Less: Preference dividend (20,00,000@8%) |
1,60,000 |
|
Earnings available to equity shareholder |
11,25,000 |
Earnings per share (EPS)
= Dividend available to shareholders ÷ No. of equity shares
= 11,25,000 ÷ 30,000 shares
= $37.50
Dividend per share (DPS)
= EPS @ 60%
= $37.5 @ 60%
= $22
Dividend Payout Ratio
It is also called payout ratio.
The company pays some part of its profit to stockholders (shareholders).
This profit part is known dividend.
Dividend payout ratio indicates how much money a company is returning to stockholders.
Investors use this ratio to calculate investment value.
It is shown in percentage.
Formula of payout ratio
|
Dividend payout ratio (DPR) |
= |
Dividend paid ÷ Net profit after preferred dividend |
|
Or |
= |
Dividend per share ÷ Earning per share |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8E
The following extracted data is available: ($/₹/Rs)
|
Net profit after preference dividend |
$320,000 |
|
|
Dividend paid |
$200,000 |
|
|
No. of equity shares of $100 |
10,000 |
|
Required: (a) Earning per share; (b) Dividend per share; (c) Dividend payout ratio
[Answer: EPS = $32; DPS = $20; DER = 62.5%]
SOLUTION
Earnings per share (EPS)
= Dividend available to shareholders ÷ No. of equity shares
= 320,000 ÷ 10,000 shares
= $32
Dividend per share (DPS)
= Dividend paid ÷ No. of equity shares
= 200,000 ÷ 10,000 shares
= $20
Dividend payout ratio (DPR)
= (Dividend paid ÷ Net profit after preference dividend) x 100
= (200,000 ÷ 320,000) x 100
= 0.625 x 100
= 62.5%
Alternatively,
Dividend payout ratio (DPR)
= (Dividend per share ÷ Earning per share) x 100
= (20 ÷ 32) x 100
= 0.625 x 100
= 62.50
Book Value per Share
Book value per share (BVPS) indicates the book value of each share.
It measures the minimum value of a company’s equity.
BVPS indicates a firm’s net assets value on a per share basis.
The investors use BVPS to evaluate a firm’s per stock price.
When company goes on winding up (liquidate), the common stock holder will get the value of one share.
Formula of book value per share
|
Book value per share |
= Total stockholders’ equity ÷ No. of common stocks outstanding |
|
|
= (Total stockholders’ equity – Preferred stocks) ÷ No. of common stocks outstanding |
|
|
= (Total tangible assets – Total liabilities) ÷ No. of common stocks outstanding |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8F
ABC Company Ltd has following extracted information:
Common stocks of $10 at par: 45,000 issued and outstanding
Retained earnings $125,350
Required: Book value per share
[Answer: BVPS = $12.76]
SOLUTION
Given and working note:
Shareholders’ equity
= Common stocks + Retained earnings
= $450,000 + $125,350
= $575,350
Book value per share
= Total stockholders’ equity ÷ No. of common stocks outstanding
= $575,350 ÷ 45,000 stocks
= $12.76
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8G
Shareholders equity section of the company’s balance sheet
|
Liabilities |
Amount |
|
Common stock of $10 par: 20,000 stocks issued and outstanding |
2,00,000 |
|
8% Preferred stocks of $100 par: 1,000 stocks issued and outstanding |
1,00,000 |
|
Additional paid in capital |
2,50,000 |
|
Retained earnings |
4,50,000 |
|
Total contributed capital |
10,00,000 |
|
Less: Treasury stock: 875 common stocks @ $125 |
(1,09,375) |
|
Total stockholders’ equity |
8,90,325 |
Required: Book value per share
[Answer: BVPS = $39.53]
SOLUTION
Book value per share
= (Total stockholders’ equity – Preferred stocks) ÷ No. of common stocks outstanding
= ($890,375 – $100,000) ÷ 20,000
= $790,625 ÷ 20,000
= $39.53
Price Earnings Ratio
Price earnings ratio is also called return on investment ratio.
It is just inverse or reciprocal of earning yield ratio.
This ratio is used to evaluate the performance of the company.
This ratio helps to take decision whether share (stock) should be purchase from market or not.
Formula of price earnings ratio
Price earnings ratio (PER) = Market value per share ÷ Earning per share
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8H
Extracted data is given to you:
Earnings per share $/₹/Rs 32
Market value per share $/₹/Rs 80
Required: Price earnings ratio
[Answer: PER = 2.5 times]
SOLUTION:
Price earnings ratio (PER)
= Market value per share ÷ Earnings per share
= 80 ÷ 32
= 2.5 times
Market Value per Share
Market value per share (MVPS) is the price of a stock that can be acquired from stock exchange.
MVPS is depended on firm’s net income, brands, technology, strategy, leadership, future prospects etc.
MVPS is based on demand and supply; so, this price varies throughout the day on stock exchange.
MVPS will rise when more investors want to buy it than are willing to sell and vice versa.
The firm’s treasurer tracks the MVPS on regular basis.
When the market price drops below a certain threshold level; the firm buyback shares from open market.
Formula of market value per share
MVPS = Existing market value per share ÷ (1 + Stock dividend rate)
MVPS = P/E ratio x Earnings per share
Difference between Market Value per Share and Book Value per Share
|
Market Value per Share |
Book Value per Share |
|
Market value per share is driven entirely by demand for a company’s shares. |
Book value per share is a firm’s net assets, divided by the number of shares outstanding. |
|
MPVS is more unstable than book value per share. |
BPVS is stable than market value per share. |
|
The market value figure is usually higher than the book value. |
The book value figure is usually lower than the market value. |
|
MVPS includes the value of intangible* assets. |
BVPS excludes the value of intangible assets. |
|
MVPS fluctuated frequently throughout the day. |
BVPS fluctuated at the time of balance sheet preparation. |
Here intangible* assets mean intellectual assets which contents brands, technology, copyrights, strategy, leadership, future prospects etc.
PROBLEM: 8I
ABC Company Ltd has following extracted information:
Existing market value per share $170
Stock dividend rate 20% or 0.2
Required: Market value per share
[Answer: $141.67]
SOLUTION
Market value per share = Existing market value per share ÷ (1 + Stock dividend rate)
= $170 ÷ (1+0.2)
= $170 ÷ 1.2
= $141.67
PROBLEM: 8J
The following extracted information is available:
P/E ratio 20 times
Earnings per share $7.50
Required: Market value per share
[Answer: MVPS = $150]
SOLUTION
Market value per share = P/E ratio x EPS
= 20 x $7.50
= $150
Keep in Mind
|
The market value of a company |
= No. of outstanding stocks x Market value per share |
|
|
= 50,000 x $22 |
|
|
= $11,00,000 or $1.1 million |
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PROBLEMS AND ANSWERS OF BVPS, MVPS, EPS, DPS, ROA, REA, PEA, DPR |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 8A
The following extracted data are taken from XYZ Company Ltd (amount in $/₹/Rs):
|
Common stock |
5,00,000 |
|
General reserve |
50,000 |
|
15% Preferred stock |
2,00,000 |
|
Net income before tax |
1,50,000 |
|
Discount on shares |
20,000 |
|
Tax rate on profit |
40% |
Required: (a) Return on stockholder equity (ROSE); (b) Return on common stockholder fund (ROCSF)
[Answer: ROSE = 12.33%; ROESF = 8.22%]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 8B
Extracted data are taken from XYZ Company Ltd (amount in $/₹/Rs):
|
Equity shares capital |
5,00,000 |
|
General reserve |
1,50,000 |
|
15% Preference shares |
3,00,000 |
|
12% Debentures |
2,00,000 |
|
Preliminary expenses |
40,000 |
|
Tax rate on profit |
40% |
|
Fixed assets |
9,00,000 |
|
|
|
Net profit before interest, tax and preference dividend 170,000
Required: (a) Return on shareholder equity (ROSE); (b) Return common stockholder fund (ROESF); (c) Return on assets
[Answer: ROSE = 9.63%; ROCSF = 6.98%; ROA = 10%
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8C
DK Company Ltd provides you following information (amount in $/₹/Rs):
|
2,000 Common stocks of $100 |
2,00,000 |
|
Tax rate |
50% |
|
10% Preferred stock of $100 |
1,00,000 |
|
Dividend paid to common stockholders |
40% |
|
Net profit before tax |
160,000 |
|
|
|
Required: (a) Earnings per share (EPS); (b) Dividend per share (DPS)
[Answer: EPS = $35; DPS = $14]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
PROBLEM: 8E
RW Company Ltd had following extracted information:
|
|
Amount $ |
|
Amount $ |
|
1,230 Common stocks of $10 at par |
12,300 |
Retained earnings |
1,996 |
|
400; 5% Preferred stock of $10 at par |
4,000 |
Total assets |
23,700 |
|
10% Long-term debt |
12,000 |
Net income after tax |
3,680 |
Additional information:
Cash dividend paid to common stocks $1,845
Price earnings ratio is 5 times
Required: (1) Return on assets; (2) Return on common stocks equity; (3) Earnings per share; (4) Dividend per share;
(5) Dividend payout ratio; (6) Book value per share; (7) Market value per share
[Answer: (1) ROA = 15.53%; (2) ROCSE = 24.34%; (3) EPS = $2.83;
(4) DPS = $1.50; (5) DPR = 0.53 time; (6) BVPS = $11.62; (7) MVPS = $14.15]
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