Question

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

Ernst Company			Young Company
Balance sheet
Cash	$	42,000			$	21,800
Accounts receivable (net)		39,800				32,800
Inventory		100,100				40,500
Operational assets (net)		141,000				401,100
Other assets		84,300				305,800
Total assets	$	407,200			$	802,000
Current liabilities	$	98,800			$	48,100
Long-term debt (9%)		64,100				58,500
Capital stock (par $10)		148,400				510,400
Contributed capital in excess of par		29,500				105,500
Retained earnings		66,400				79,500
Total liabilities and stockholders’ equity	$	407,200			$	802,000
Income statement
Sales revenue (1/3 on credit)	$	447,900			$	802,000
Cost of goods sold		(242,900	)			(398,900	)
Expenses (including interest and income tax)		(16,200	)			(311,800	)
Net income	$	188,800			$	91,300
Selected data from the 2014 statements
Accounts receivable (net)	$	18,100			$	38,400
Inventory		94,300				45,300
Long-term debt		62,000				49,000
Other data
Per share price at end of 2015 (offering price)	$	22			$	20
Average income tax rate		40	%			40	%
Dividends declared and paid in 2015	$	33,600			$	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).)

Ratio ERNST COMPANY YOUNG COMPANY Tests of profitability: 1. Return on equity % % 2. Return on assets % % 3. Financial leverage percentage % % 4. Earnings per share 5. Profit margin % % 6. Fixed asset turnover Tests of liquidity: 7. Cash ratio 8. Current ratio 9. Quick ratio 10. Receivable turnover 11. Inventory turnover Solvency and equity position: 12. Debt/equity ratio Market tests: 13. Price/earnings ratio 14. Dividend yield ratio % %

Answer 1

Answer:

Ernst Company:

Part 1.
Stockholders’ Equity = Capital Stock + Contributed capital excess of par + Retained Earnings
Stockholders, Equity = $148,400 + $29,500 + $66,400
Stockholders’ Equity = $244,300

Return on Equity = Net Income / Stockholders Equity
Return on Equity = $188,800 / $244,300
Return on Equity = 77.2820%

Part 2:
Return on Assets = Net Income /Total Assets
Return on Assets = $188,800 / $407,200
Return on Assets = 46.37%

Part 3:
Financial Leverage = Total Debt / Total Stockholders’ Equity
Financial Leverage = 64,100 / 244,300
Financial Leverage = 26.24%

Part 4:
Earning per Share = Net Income / Stock Outstanding
Stock Outstanding = 148,400 /10 = 14,840
Earning per Share = 188,800 / 14,840
Earning per Share = $12.72

Young Company:

Part 1:
Stockholders’ Equity = Capital Stock + Contributed capital excess of par + Retained Earnings
Stockholders, Equity = $510,400 + $105,500 + $79,500
Stockholders’ Equity = $695,400

Return on Equity = Net Income / Stockholders Equity
Return on Equity = $91,300 / $695,400
Return on Equity = 13.13%

Part 2:
Return on Assets = Net Income / Total Assets
Return on Assets = $91,300 / $802,000
Return on Assets = 11.38%

Part 3:
Financial Leverage = Total Debt / Total Stockholders’ Equity
Financial Leverage = 58,500 / 244,300
Financial Leverage = 8.41%

Part 4:
Earning per Share = Net Income / Stock Outstanding
Stock Outstanding = 510,400 /10 = 51,040 Stocks
Earning per Share = 91,300 / 51,040
Earning per Share = $1.79