Description
DECISION MAKING ACROSS THE ORGANIZATION
BYP11-7 In recent years the fast-food chain Wendy’s International has purchased many
treasury shares. From January 3, 1999, to December 30,
2001, the number of shares outstanding
has fallen from 124 million to 105 million. The following
information was drawn
from the company’s financial statements (in millions).
Year ended
Dec. 30, 2001 Jan. 3, 1999
Net income $ 193.6 $ 123.4
Total assets 2,076.0 1,837.9
Average total assets 2,016.9 1,889.8
Total common stockholders’ equity 1,029.8 1,068.1
Average common stockholders’ equity 1,078.0 1,126.2
Total liabilities 1,046.3 769.9
Average total liabilities 939.0 763.7
Interest expense 30.2 19.8
Income taxes 113.7 84.3
Cash provided by operations 305.2 233.8
Cash dividends paid on common stock 26.8 31.0
Preferred stock dividends 0 0
Average number of common shares outstanding 109.7 119.9
Instructions
Use the information provided to answer the following
questions.
(a) Compute
earnings per share, return on common stockholders’ equity, and return
on assets for both years. Discuss the change in the
company’s profitability over this
period.
(b) Compute
the dividend payout ratio. Also compute the average cash dividend paid per
share of common stock (dividends paid divided by the
average number of common
shares outstanding). Discuss any change in these ratios
during this period and the
implications for the company’s dividend policy.
(c) Compute
the debt to total assets ratio and interest coverage ratio. Discuss the change
in the company’s solvency.
(d) Based
on your findings in (a) and (c), discuss to what extent any change in the
return on common stockholders’ equity was the result of
increased reliance on
debt.
(e) Do
the purchase of treasury stock and the shift toward more reliance on debt
appear
to have been wise strategic moves?