Question

The 2015 financial statements for the Ernst and Young companies are summarized here: Ernst Company Young Company Balance sheet Cash $ 42,900 $ 22,900 Accounts receivable (net) 39,500 31,600 Inventory 99,200 40,900 Operational assets (net) 141,400 402,500 Other assets 84,200 305,100 Total assets $ 407,200 $ 803,000 Current liabilities $ 97,100 $ 48,800 Long-term debt (9%) 63,700 58,400 Capital stock (par $10) 149,000 511,200 Contributed capital in excess of par 29,700 105,900 Retained earnings 67,700 78,700 Total liabilities and stockholders’ equity $ 407,200 $ 803,000 Income statement Sales revenue (1/3 on credit) $ 447,300 $ 803,900 Cost of goods sold (242,800 ) (399,300 ) Expenses (including interest and income tax) (16,200 ) (312,800 ) Net income $ 188,300 $ 91,800 Selected data from the 2014 statements Accounts receivable (net) $ 19,500 $ 38,700 Inventory 94,800 46,000 Long-term debt 60,400 49,600 Other data Per share price at end of 2015 (offering price) $ 20 $ 18 Average income tax rate 20 % 20 % Dividends declared and paid in 2015 $ 34,800 $ 149,500 The companies are in the same line of business and are direct competitors in a large metropolitan area.Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Young is more conservative, and as its president has said, “We avoid what we consider to be undue risk.” Neither company is publicly held. Ernst Company has an annual audit by a CPA but Young Company does not. Required: 1. Complete a schedule that reflects a ratio analysis of each company. (Round your answers to 2 decimal places. Enter percentage answers rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)

Answer 1

	Ratio	Formula	Ernst Company	Young Company
			%	%
	Tests of Profitability
1	Return on Equity	(Net Income/Total Capital)*100	76.42	13.19
2	Return on Assets	(Net Income/Total Assets)*100	46.24	11.43
3	Financial Leverage Percentage	(Total Debt/ Total Capital)*100	65.26	15.41
4	Earning per share In $	(Net Income/No. of outstanding Shares)	$12.64	$1.80
5	Profit margin	(Net Income / Net Sales)*100	42.10	11.42
6	Fixed Assets Turnover	(Operational Assets/ Turnover)*100	31.61	50.07
	Test of liquidity
7	Cash Ratio	(Cash / Current Liabilities) *100	44.18	46.93
8	Current Ratio	(Current Assets/ Current Liabilities) *100	1.87	1.95
9	Quick Ratio	((Cash + Account receivable)/ Current Liabilites)*100	84.86	111.68
10	Receivable Turnover	(Account receivable/ Turnover) *100	8.83	3.93
11	Inventory Turnover	( Inventory/ Turnover)*100	22.18	5.09
	Solvancy and Equity position
12	Debt/ Equity Ratio	Debt / Equity	89.98	17.37
	Market Tests
13	Price Earning Ratio	Market Price Per Share/ Earnings Per Sahre	1.58	10
14	Dividend Yield Ratio	cash Dividend Per Share / Market Value Per Sahre	1.48	0.29
	Working Balance Sheet Ernst Company Young Company Cash 42,900 22,900 Accounts receivable (net) 39,500 31,600 Inventory 99,200 40,900 Operational assets (net) 141,400 402,500 Other assets 84,200 305,100 Total assets 407,200 803,000 Current liabilities 97,100 48,800 Long-term debt (9%) 63,700 58,400 Capital stock (par $10) 149,000 511,200 Contributed capital in excess of par 29,700 105,900 Retained earnings 67,700 78,700 Total liabilities and stockholders' equity 407,200 803,000 Income statement Sales revenue (1/3 on credit) 447,300 803,900 Cost of goods sold -242,800 -399,300 Expenses (including interest and income tax) -16,200 -312,800 Net income 188,300 91,800 Selected data from the 2014 statements Accounts receivable (net) 19,500 38,700 Inventory 94,800 46,000 Long-term debt 60,400 49,600 Other data Per share price at end of 2015 (offering price) 20 18 Average income tax rate 20% 20% Dividends declared and paid in 2015 34,800 149,500

Total Capital	Capital stock (par $10)	149,000	511,200
	Contributed capital in excess of par	29,700	105,900
	Retained earnings	67,700	78,700
	Total Capital	246,400	695,800
Total Debt	Current liabilities	97,100	48,800
	Long-term debt (9%)	63,700	58,400
	Total Debt	160,800	107,200

Cash Dividend

Dividend Paid / No of Outstanding sahres

34800/14900=2.3356

149500/51120=2.9245