The Covid-19 crisis led to a sharp drop in revenue and, as a result, the depletion of cash, debt servicing problems and, in some cases, bankruptcy.

The Covid-19 crisis led to a sharp drop in revenue and, as a result, the depletion of cash, debt servicing problems and, in some cases, bankruptcy. If you could invest $100,000 in one company, based only on the five ratios below, which stock would be the most suitable to buy?

	a.	Stock D: P/E = 25.0; cash ratio = 0.2x; EBIT/Interest = 2.1x; Debt/equity = 70%; ROIC = 8%
	b.	Stock B: P/E = 17.5; cash ratio = 0.4x; EBIT/Interest = 7x; Debt/equity = 45%; ROIC = 12%
	c.	Stock A: P/E = 15.0; cash ratio = 0.6x; EBIT/Interest = 10x; Debt/equity = 30%; ROIC = 14%
	d.	Stock C: P/E = 20.0; cash ratio = 0.9x; EBIT/Interest = 15x; Debt/equity = 25%; ROIC = 16%

Solutions

Expert Solution

As debt servicing problems is the leading cause of banruptcy, the stock with the best debt service coverage ratio need to be chosen. Stock C has the best debt interest coverage ratio of 15x , best cash ratio of 0.9x (liquidity) and comfortable Debt to equity ratio of 25% (lowest among all). In addition to all these, Stock C also provides the best ROIC figures. So answer is

Stock C: P/E = 20.0; cash ratio = 0.9x; EBIT/Interest = 15x; Debt/equity = 25%; ROIC = 16%

jeff jeffy answered 2 years ago

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