During a recent period, the fast-food chain Wendy”s International purchased many treasury shares….During a recent period, the fast-food chain Wendy”s International purchased many treasury shares….
During a recent period, the fast-food chain Wendy"s International purchased many treasury shares. This caused the number of shares outstanding to fall from 124 million to 105 million. The following information was drawn from the company"s financial statements (in millions).
Host Marriott
Marriott International
Sales
$1,501
$8,415
Net income
(25)
200
Total assets
3,822
3,207
Total liabilities
3,112
2,440
Common stockholders" equity
710
767
Information for the
Information for the
Year after Purchase
Year before Purchase
of Treasury Stock
of Treasury Stock
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) Does it appear that the purchase of treasury stock and the shift toward more reliance on debt were wise strategic moves?
