Question

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Best Digital Corp. and Zone Network, Inc. and have assembled the following data.

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Best Digital Corp. and Zone Network, Inc. and have assembled the following data Your strategy is to invest in companies that have low pricelearnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis Read the requirements. EEB (Click to view the income statement data.) EEB (Click to view the balance sheet and market price data.) Requirement 1a. Compute the acid-test ratio for both companies for the current year Begin by selecting the formula to compute the acid-test ratio Acid-test ratio (Cash Short-term investments Accounts receivable, net) /Total current liabilities Now, compute the acid-test ratio for both companies. (Round your answers to two decimal places, X.Xx.) Best Digital Zone Network 0.80 Acid-test ratio Requirement 1b. Compute the inventory turnover for both companies for the current year. Begin by selecting the formula to compute the inventory turnover Inventory turnover Cost of goods sold / Average merchandise inventory Now, compute the inventory turnover for both companies. (Round your answers to two decimal places, X.XX.) Best Digital 2.79 Zone Network 2.72 Inventory turnover Requirement 1c. Compute the days' sales in receivables for both companies for the current year. Begin by selecting the formula to compute the days' sales in receivable Davs' sales in receivables Now, compute the days' sales in receivables for both companies. (Round interim calculations to two decimal places and your final answers to the nearest whole day.) Best Digital Zone Network Days' sales in receivables Requirement 1d. Compute the debt ratio for both companies for the current year.

Answer 1

1.

1. Acid Test Ratio: Quick assets/current liabilities

= (cash+short term investments +accounts receivables net)/current liabilities

Particulars	Best Digital	Zone network
Cash+short term investments+ Accounts receivables net(A)	$ 105000	$ 78000
Current liabilities(B)	$ 105000	$ 97000
Quick ratio=(A)/(B)	1	0.80

2. Inventory Turnover : Cost of goods sold/Average inventory

Particulars	Best Digital	Zone network
Cost of Goods sold	$208000	$257000
Average inventory	$ 74500 ($ 64000+$850000/2	($ 99000+$90000)/2
Inventory turnover ratio	2.79	2.72

3. Days’ sales in receivables

Accounts receivables turnover ratio=Average accounts receivable/Total Credit sales

Particulars	Best Digital	Zone network
Average accounts receivables	$ 39000 $(37000+41000)/2	$ 48500 $(44000+53000)/2
Total Credit Sales	$ 416830	$ 493845
Accounts Receivable Turnover Ratio	`10.69	10.18
Days’ Sales in Receivables =365/Accounts receivable turnover ratio	34.14 days	35.85 days

4. Debt Ratio=Total Liabilities/Total Assets

Particulars	Best Digital	Zone network
Total Liabilities	$105000	$133000
Total Assets	$261000	$325000
Debt Ratio	0.40	0.41

5. Earnings per share of common stock

Particulars	Best Digital	Zone network
Net Income	$ 58000	$ 68000
Number of shares	10,000	15,000
Earnings Per Share	$ 5.8/share	$ 4.53/share

6. Price/Earnings ratio=Share Price/Earnings per share

Particulars	Best Digital	Zone network
Share Price	$ 81.20	$117.78
Earnings Per Share	$ 5.8/share	$ 4.53/share
Price/Earnings ratio	14 times	26 times

7. Dividend Payout= Total Dividends/Net Income

Particulars	Best Digital	Zone network
Total Dividends	$ 9000 (0.90*10000)	$ 7500 (0.50*15000)
Net Income	$ 58000	$ 68000
Dividend Payout	15.52%	11.03%

      

2.

The strategy is to invest in companies that have low price earnings ratio .As per this strategy Best Digital is the choice that needs to be taken.

When the best Digital’s quick ratio is considered , it is higher and greater the ratio, the more financially secure a company is in the short term. On the other hand, a high or increasing acid-test ratio generally depicts that a company is going through a solid top-line growth, quickly converting receivables into cash, and easily able to cover its financial obligations..But the inventory turnover of Best Digital is higher and the quick ratio of companies with high inventory turnover should not be considered.

Debt ratios can be used to indicatethe financial health of individuals and businesses. Since the interest on a debt must be paid irrespective of business profitability, too much debt may compromise the entire operation and in the case of Best Digital the debt is lower.

The days in sales receivables is the average number of ys a co takes to collect payments on goods sold and since it is lower it is better

Earnings per share is also higher

A higher payout ratio indicates that a company is sharing more of its earnings with stockholders.and Best Digital had a higher dividend payout.