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.
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Company A
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Company B
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|
Balance Sheet
|
|
|
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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
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|
|
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Sales revenue (1/3 of sales on credit)
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452,000
|
799,000
|
|
Cost of goods sold
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(250,000)
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(396,000)
|
|
Expenses (including interest and taxes)
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(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
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|
|
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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
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Company B
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|
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
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Required:
Evaluate the companies as a potential investment based on the given ratios.
Problem 4
In 2011, Jeffrey Company disposed of a segment of its business and incurred a pretax loss on the disposal of $40,000. In the same year, a flood caused $15,000 of damages to the building. The flood damage qualified as an extraordinary item. Income from continuing operations before taxes was $100,000 for 2011 and the 20 percent tax rate applied to all of the items above. Prepare a partial income statement starting with income from continuing operations before taxes for the year 2011 and concluding with net income.