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Argent Corporation had earnings per share of $4 last year, and it paid a $2 divi-dend. Total retained earnings increased by $12 million during the year, and bookvalue per share at year-end was $40. Argent has no preferred stock, and no newcommon stock was issued during the year. If Argent’s year-end debt (whichequals its total liabilities) was $120 million, what was the company’s year-enddebt/assets ratio?Chapter 3: Analysis of Financial Statements 111

Question

Argent Corporation had earnings per share of 4lastyear,anditpaida4 last year, and it paid a 2 divi-dend. Total retained earnings increased by 12millionduringtheyear,andbookvaluepershareatyear−endwas12 million during the year, and bookvalue per share at year-end was 40. Argent has no preferred stock, and no newcommon stock was issued during the year. If Argent’s year-end debt (whichequals its total liabilities) was $120 million, what was the company’s year-enddebt/assets ratio?Chapter 3: Analysis of Financial Statements 111

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Solution

To calculate the year-end debt/assets ratio, we first need to find the total assets of Argent Corporation.

  1. We know that the company's retained earnings increased by 12millionduringtheyear.Thismeansthatthecompanyearned12 million during the year. This means that the company earned 12 million more than it paid out in dividends.

  2. We also know that the company's earnings per share (EPS) was 4anditpaida4 and it paid a 2 dividend. This means that the company retained 2pershare(2 per share (4 EPS - 2dividend=2 dividend = 2 retained).

  3. If we divide the total increase in retained earnings (12million)bytheamountretainedpershare(12 million) by the amount retained per share (2), we can find the total number of shares. 12million/12 million / 2 per share = 6 million shares.

  4. The book value per share at year-end was 40.Ifwemultiplythisbythetotalnumberofshares,wecanfindthetotalequityofthecompany.40. If we multiply this by the total number of shares, we can find the total equity of the company. 40 per share * 6 million shares = $240 million in equity.

  5. The company's total liabilities (or debt) at year-end was $120 million.

  6. The company's total assets would be the sum of its debt and equity. 120millionindebt+120 million in debt + 240 million in equity = $360 million in total assets.

  7. Finally, we can calculate the debt/assets ratio by dividing the debt by the total assets. 120millionindebt/120 million in debt / 360 million in total assets = 0.33 or 33%.

So, the company's year-end debt/assets ratio was 33%.

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