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Problem 1

You have the opportunity to invest $10,000 in one of two companies that are part of the same industry. The only information you have about the companies is presented below. Assume that high means in the top third of the industry, average means in the middle third and low is in the bottom third. Based on this information, which company would you select? Explain you selection.

 

                Ratio                                                      Company A                         Company B

ROA                                                                       Average                               High

Profit Margin                                                     Low                                        High

Financial Leverage                                           Low                                        High

Current ratio                                                      High                                       Low

Price/Earnings                                                   Average                               High

Debt-to-Equity                                                  Low                                        High

 


Problem 2

Below are current year financial statements for two companies in the same industries and direct competitors. Both companies have been in operation approximately the same length of time.

 

 

Company A

Company B

Balance Sheet

 

 

Cash

31,000

16,000

Accounts receivable (net)

29,000

24,000

Inventory

87,000

29,000

Property and equipment, net

125,000

394,000

Other assets

79,000

298,000

   Total assets

351,000

761,000

Current liabilities

  91,000

  47,000

Long-term debt (5% interest)

62,000

58,000

Capital stock ($5 par)

145,000

505,000

Contributed capital in excess of par

18,000

103,000

Retained earnings

  35,000

  48,000

    Total liabilities and stockholders’ equity

351,000

761,000

Income Statement

 

 

Sales revenue (1/3 of sales on credit)

452,000

799,000

Cost of goods sold

(250,000)

(396,000)

Expenses (including interest and taxes)

(161,000)

(308,000)

     Net income

     41,000

     95,000

Selected data from prior year

 

 

Accounts receivable (net)

16,000

33,000

Inventory

81,000

42,000

Property and equipment, net

110,000

375,000

Long-term debt

65,000

70,000

Other data

 

 

Market price per share at end of current year

$16

$13

Average income tax rate

25%

25%

Dividends declared and paid in current year

22,000

88,000

 

Required:

1)      Prepare a schedule reflecting a ratio analysis of each company. Compute all ratios from the module for which you have enough data.

2)      If an investor were considering an investment in one of these companies, which would you recommend based on this data? Explain your response.

 


Problem 3

Below are ratios for two companies which operate in the same industry.

 

 

Company A

Company B

P/E

27.8

63.0

Gross profit margin

59.1

66.2

Profit Margin

8.6

13.1

Quick

.8

0.5

Current

1.2

0.65

Debt-to-equity

.45

0.78

Return on equity

29.0

26.9

Return on assets

16.8

28.2

Dividend yield

1.7

1.2

Dividend payout

44.0

67.0

 

Required:

Evaluate the companies as a potential investment based on the given ratios.

    • Posted: 7 years ago
    • Due: 
    • Budget: $17
    Answers 1

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