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Problem 13-5A Comparative ratio analysis LO P3

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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	$	770,000		$	880,200
Cash	$	19,500		$	34,000			Cost of goods sold		585,100			632,500
Accounts receivable, net		46,500			64,600			Interest expense		7,900			13,000
Merchandise inventory		84,440			132,500			Income tax expense		14,800			24,300
Prepaid expenses		5,000			6,950			Net income		162,200			210,400
Plant assets, net		290,000			304,400			Basic earnings per share		4.51			5.11
Total assets	$	445,440		$	542,450			Cash dividends per share		3.81			3.93
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	61,340		$	93,300			Accounts receivable, net	$	29,800		$	54,200
Long-term notes payable		80,800			101,000			Merchandise inventory		55,600			107,400
Common stock, $5 par value		180,000			206,000			Total assets		398,000			382,500
Retained earnings		123,300			142,150			Common stock, $5 par value		180,000			206,000
Total liabilities and equity	$	445,440		$	542,450			Retained earnings		98,300			93,600

Problem 13-5A Part 2

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 each company’s stock can be purchased at $75 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

(1)

profit margin ratio = net income/sales

for Barco company,

= $162200/$770000 = 21.06%

for Kyan company,

= $210400/$880200 = 23.90%

(2)

total assets turnover = sales/average total assets

for Barco company,

= $770000/{($445440 + $398000)/2} = 1.83 times

for Kyan company,

= $880200/{($542450 + $382500)/2} = 1.90 times

(3)

return on total assets (ROTA) = earning before interest and taxes /average total assets

earning before interest and taxes = net income + income tax expense + interest expense

Therefore,

for Barco company,

= ($162200 + $14800 + $7900)/{($445440 + $398000)/2}

= $184900/$421720 = 43.84%

for Kyan company,

= ($210400 + $24300 + $13000)/{($542450 + $382500)/2}

= $247700/$462475 = 53.56%

(4)

Return on common stockholders equity = (net income - preferred dividends)/average common stockholders equity

Common stockholders equity = common stock + retained earnings

for Barco company,

Average common stockholders equity = {($180000 + $123300) + ($180000 + $98300)}/2 = $290800

Therefore,

Return on common stockholders equity = ($162200 - $0)/$290800 = 55.78%

for Kyan company,

Average common stockholders equity = {($206000 + $142150) + ($206000 + $93600)}/2 = $323875

Therefore,

Return on common stockholders equity = ($210400 - $0)/$323875 = 64.96%