Problem 1You have the opportunity to invest $10000 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 BROA Average HighProfit Margin Low HighFinancial Leverage Low HighCurrent ratio High LowPrice/Earnings Average HighDebt-to-Equity Low HighProblem 2Below 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 ACompany BBalance Sheet
Cash3100016000Accounts receivable (net)2900024000Inventory8700029000Property and equipment net125000394000Other assets79000298000 Total assets351000761000Current liabilities 91000 47000Long-term debt (5% interest)6200058000Capital stock ($5 par)145000505000Contributed capital in excess of par18000103000Retained earnings 35000 48000 Total liabilities and stockholders equity351000761000Income Statement
Sales revenue (1/3 of sales on credit)452000799000Cost of goods sold(250000)(396000)Expenses (including interest and taxes)(161000)(308000) Net income 41000 95000Selected data from prior year
Accounts receivable (net)1600033000Inventory8100042000Property and equipment net110000375000Long-term debt6500070000Other data
Market price per share at end of current year$16$13Average income tax rate25%25%Dividends declared and paid in current year2200088000Required: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 3Below are ratios for two companies which operate in the same industry.Company ACompany BP/E27.863.0Gross profit margin59.166.2Profit Margin8.613.1Quick.80.5Current1.20.65Debt-to-equity.450.78Return on equity29.026.9Return on assets16.828.2Dividend yield1.71.2Dividend payout44.067.0Required:Evaluate the companies as a potential investment based on the given ratios.
