Question

[The following information applies to the questions displayed below.] Summary information from the financial statements of two companies competing in the same industry follows. Barco Company Kyan Company Barco Company Kyan Company Data from the current year-end balance sheets Data from the current year’s income statement Assets Sales $ 790,000 $ 898,200 Cash $ 19,000 $ 34,000 Cost of goods sold 595,100 650,500 Accounts receivable, net 37,400 53,400 Interest expense 9,200 18,000 Current notes receivable (trade) 9,500 8,200 Income tax expense 15,185 24,797 Merchandise inventory 85,040 134,500 Net income 170,515 204,903 Prepaid expenses 5,600 7,500 Basic earnings per share 4.06 4.34 Plant assets, net 290,000 307,400 Cash dividends per share 3.78 3.94 Total assets $ 446,540 $ 545,000 Beginning-of-year balance sheet data Liabilities and Equity Accounts receivable, net $ 26,800 $ 53,200 Current liabilities $ 67,340 $ 103,300 Current notes receivable (trade) 0 0 Long-term notes payable 80,800 115,000 Merchandise inventory 57,600 111,400 Common stock, $5 par value 210,000 236,000 Total assets 428,000 392,500 Retained earnings 88,400 90,700 Common stock, $5 par value 210,000 236,000 Total liabilities and equity $ 446,540 $ 545,000 Retained earnings 76,645 71,765 2a. For both companies compute the (a) profit margin ratio, (b) total asset turnover, (c) return on total assets, and (d) return on common stockholders’ equity. Assuming that share and each company’s stock can be purchased at $80 per share, compute their (e) price-earnings ratios and (f) dividend yields. (Do not round intermediate calculations. Round your answers to 2 decimal places.) 2b. Identify which company’s stock you would recommend as the better investment.

Answer 1

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Income Statement	Barco	Kyan			Barco	Kyan
Sales	790,000.00	898,200.00		Answer 2 a
Cost of goods sold	595,100.00	650,500.00		Profit margin %	21.6%	22.8%
Gross Profit	194,900.00	247,700.00		Net Income/Net Sales
Interest Expense	9,200.00	18,000.00
Income before taxes	185,700.00	229,700.00		Total Assets Turnover Ratio	1.8	1.9
Income tax expense	15,185.00	24,797.00		Sales Revenue/Average Assets
Net Income	170,515.00	204,903.00
Basic Earnings per share	4.06	4.34		Return on Total Assets	38.2%	37.6%
Cash Dividends per share	3.78	3.94		Net Income/Total Assets
Balance Sheets				Return on Common Stock holders Equity	57.1%	62.7%
Assets	Barco	Kyan		Net Income/Common Stock holders Equity
Current Assets
Cash	19,000.00	34,000.00		Price Earnings Ratio	18.5	17.3
Accounts Receivable (net)	37,400.00	53,400.00		Market Price Per Share/ Earnings Per share on Common Stock
Current Notes Receivable (trade)	9,500.00	8,200.00
Merchandise Inventory	85,040.00	134,500.00		Dividend Yield	5.0%	5.3%
Prepaid Expenses	5,600.00	7,500.00		Dividend Per share on Common Stock/ Market Price Per Share
Total Current Assets	156,540.00	237,600.00
Plant assets, net	290,000.00	307,400.00		Answer 2 b
Total Assets	446,540.00	545,000.00		Remarks- Kyan is a better investment opportunity because all of the above ratios are better and more improved than Barco.
Liabilities & Stockholders' Equity
Liabilities
Current Liabilities	67,340.00	103,300.00
Long Term Note payable	80,800.00	115,000.00
Total Liabilities	148,140.00	218,300.00
Common Stock $ 5 par	210,000.00	236,000.00
Retained Earnings	88,400.00	90,700.00
Total Stockholders' Equity	298,400.00	326,700.00
Total Liabilities & Stockholders' Equity	446,540.00	545,000.00
Barco	Current	Last Year		Kyan	Current	Last Year
Total assets	446,540.00	428,000.00		Total assets	545,000.00	392,500.00
Average assets	437,270.00			Average assets	468,750.00