100 1

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.