Exercise NO: 19

Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has a

Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000.

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Jana Kingston Co. Mary Ann Benson Co.

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Current liabilities $ 300,000 Current liabilities $ 600,000

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Long-term debt, 10% 1,200,000 Common stock ($20 par) 2,900,000

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Common stock ($20 par) 2,000,000 Retained earnings (Cash

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Retained earnings (Cash dividends, $328,000) 700,000 dividends, $220,000) 700,000

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$4,200,000 $4,200,000

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For the year, each company has earned the same income before interest and taxes.

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Jana Kingston Co. Mary Ann Benson Co.

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Income before interest and taxes $1,200,000 $1,200,000

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Interest expense 120,000 –0–

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1,080,000 1,200,000

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Income taxes (45%) 486,000 540,000

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Net income $ 594,000 $ 660,000

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At year end, the market price of Kingston’s stock was $101 per share, and Benson’s was $63.50.

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Instructions

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(a) Which company is more profitable in terms of return on total assets?

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(b) Which company is more profitable in terms of return on common stock equity?

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(c) Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.

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(d) From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?

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(e) What is the book value per share for each company?

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