Question

The 2015 financial statements for the Ernst and Young companies are summarized here:

	Ernst Company			Young Company
Balance sheet
Cash	$	42,700			$	22,000
Accounts receivable (net)		39,200				31,800
Inventory		100,200				40,100
Operational assets (net)		141,500				401,700
Other assets		84,300				305,800
Total assets	$	407,900			$	801,400
Current liabilities	$	97,700			$	48,900
Long-term debt (9%)		64,700				59,700
Capital stock (par $10)		149,200				512,000
Contributed capital in excess of par		29,100				104,300
Retained earnings		67,200				76,500
Total liabilities and stockholders’ equity	$	407,900			$	801,400
Income statement
Sales revenue (1/3 on credit)	$	447,900			$	802,700
Cost of goods sold		(242,100	)			(398,400	)
Expenses (including interest and income tax)		(16,300	)			(312,600	)
Net income	$	189,500			$	91,700
Selected data from the 2014 statements
Accounts receivable (net)	$	19,400			$	39,400
Inventory		95,600				45,800
Long-term debt		61,000				49,600
Other data
Per share price at end of 2015 (offering price)	$	24			$	22
Average income tax rate		40	%			40	%
Dividends declared and paid in 2015	$	34,200			$	148,300

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).) Ratio Earnst Young Return on equity Return on assets Financial leverage percentage earnings per share profit margin Fixed aset turnover cash to ratio current ratio quick ratio receivable turnover inventory turnover debt/equity ratio price/earnings ratio Dividend yield ratio

     

Answer 1

Answer 1:

Ernst Company:

Part 1.

Stockholders’ Equity = Capital Stock + Contributed capital excess of par + Retained Earnings
Stockholders, Equity = $149,200 + $29,100 + $67,200
Stockholders’ Equity = $245,500

Return on Equity = Net Income / Stockholders Equity
Return on Equity = $189,500 / $245,500
Return on Equity = 77.19%

Part 2:

Return on Assets = Net Income /Total Assets
Return on Assets = $189,500 / $407,900
Return on Assets = 46.46%

Part 3:
Financial Leverage = Total Debt / Total Stockholders’ Equity
Financial Leverage = 64,700 / 245,500
Financial Leverage = 26.35%

Part 4:

Earning per Share = Net Income / Stock Outstanding
Stock Outstanding = 149,200 /10 = 14,920
Earning per Share = 189,500 / 14,920
Earning per Share = $12.70

Young Company:

Part 1:

Stockholders’ Equity = Capital Stock + Contributed capital excess of par + Retained Earnings
Stockholders, Equity = $512,000 + $104,300 + $76,500
Stockholders’ Equity = $692,800

Return on Equity = Net Income / Stockholders Equity
Return on Equity = $91,700 / $692,800
Return on Equity = 13.24%

Part 2:

Return on Assets = Net Income / Total Assets
Return on Assets = $91,700 / $801,400
Return on Assets = 11.44%

Part 3:

Financial Leverage = Total Debt / Total Stockholders’ Equity
Financial Leverage = 59,700 / 692,800
Financial Leverage = 8.62%

Part 4:

Earning per Share = Net Income / Stock Outstanding
Stock Outstanding = 512,000 /10 = 51,200 Stocks
Earning per Share = 91,700 / 51,200
Earning per Share = $1.79