Question

Urgent Corporation had earnings per share of $4 last year, and it paid a $2 dividend.

Total retained earnings increased by $12 million during the year, and book value per

share at year-end were $40. Urgent Corporation has no preferred stock, and no new

common stock was issued during the year. If Argent’s year-end debt (which equals its

total liabilities) was $120 million, what was the company’s year-end debt/assets ratio?

Answer 1

We will find the authorized capital

$Number of common stock = \frac{Retained earnings}{ (EPS-DPS)}=\frac{12}{4-2}=6$

$authorized capital=6\times40=240$

$EPS=\frac{net profit}{Number of common stock}$

$4=\frac{net profit}{6} ​$

net profit=24

$Retained earnings=24+24-2\times6=42$

liabilities=assets=240+42=282

$debt/assets ratio=\frac{120}{282}=0.43$ or 43%

43% of the company's assets are financed by debt