Gerrard construction co. is an excavation contractor.

Gerrard Construction Co. is an excavation contractor. The following summarized data (in thousands) are taken from the December 31, 2007, financial statements:

FOR THE YEAR ENDED DECEMBER 31, 2007:

Net Revenue………………….. …$16,100 
Cost of Services Provided……….5,700
Depreciation expense……………3,250
Operating Income………………..$7,150
Interest Expense………………….1,900
Income Tax expense……………..1,600
Net Income…………………………$3,650

AT DECEMBER 31, 2007

ASSETS
Cash and short-term investments………………$1,400
Accounts receivable, net………………………….4,900
Property, plant, and equipment, net……………38,700
Total Assets…………………………………………$45,000

LIABILITIES AND OWNERS EQUITY

Accounts payable……………………………………$750
Income taxes payable……………………………….800
Notes payable (long term)………………………….23,750
Paid-in capital…………………………………………5,000
Retained earnings……………………………………14,700
Total liabilities and owners equity………………..$45,000

At December 31,2006 total assets were $41,000 and total owners equity was $16,300. There were no changes in notes payable or paid-in capital during 2007.

1 Gerrard Construction Company wishes to lease some new earth moving equipment from Caterpillar on a long-term basis. What impact (increase, decrease, or no effect) would a capital lease of $2 million have on the company’s debt ratio and debt/equity ratio?

2 Calculate the amount of dividends declared and paid during the year ended December 31, 2007 (Hint: Do a T-account analysis of retained earnings.)

3 Review the answer to question number 2. At this time assume that Gerrard Construction Co. had 1,200,000 shares of $1 par value common stock outstanding throughout 2007, and that the market price per share of common stock at December 31, 2007 was $18.75. Calculate the following profitability measures for the year ended December 31, 2007.

1. Earnings per share of common stock

2. Price/earnings ratio
3. Dividend yield
4. Dividend payout ratio