Question

Required information [The following information applies to the questions displayed below.] Summary information from the financial statements of two companies competing in the same industry follows. Kyan Company Barco Kyan Company Barco Company Data from the current year's income statement Company Data from the current year-end balance sheets $800,000 $882,200 648,500 11,000 24,355 Sales Assets $ 18,000 $ 35,000 595,100 9,000 15,377 180,523 Cash Cost of goods sold Interest expense Income tax expense Accounts receivable, net Merchandise inventory 40,400 85,040 5,500 54,400 134,500 Prepaid expenses 7,750 312,400 Net income 198,345 4. 20 Plant assets, net 320,000 Basic earnings per share 4.30 $468,940 $544,050 Total assets Cash dividends per share 3.72 3.99 Beginning-of-year balance sheet data Accounts receivable, net Merchandise inventory Liabilities and Equity $ 29,800 $ 57,200 53,600 $ 71,340 $ 91,300 Current liabilities 84,800 210,000 Long-term notes payable Common stock, $5 par value Retained earnings 103,000 236,000 113,750 111,400 392,500 Total assets 408,000 102,800 Common stock, $5 par value 236,000 210,000 $468,940 $544,050 Retained earnings Total liabilities and equity 103,733 78,517 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

2A profit margin ratio

Profit Margin Ratio Company Choose Numerator: / Choose Denominator: = Profit margin ratio Net income / Net sales = Profit margin ratio Barco $180523 / $800,000 = 22.6 % Kyan $198345 / $882200 = 22.5 %

2A Total asset turnover

	Total Asset Turnover
Company	Choose Numerator:	/	Choose Denominator:	=	Total Asset Turnover
	Net sales	/	Average total assets	=	Total asset turnover
Barco	$800,000	/	$438470	=	1.8	times
Kyan	$882200	/	$468275	=	1.9	times

Average total assets = (beginning total assets+ending total assets)/2

Barco = (408000+468940)/2 = 438470

Kyan = (                392500+544050)/2 = 468275

2A Return on Total Assets

	Return on Total Assets Company Choose Numerator: / Choose Denominator: = Return on Total Assets Net income / Average total assets = Return on total assets Barco $180523 / $438470 = 41.2 % Kyan $198345 / $468275 = 42.4 %

2A Return on Common Stockholders’ Equity

Return On Common Stockholders' Equity Company Choose Numerator: / Choose Denominator = Return On Common Stockholders' Equity Net income - Preferred dividends / Average common stockholders' equity = Return on common stockholders' equity Barco $180523 - / $300659 = 60.0 % Kyan $198345 - / $344742 = 57.5 %

Average common stockholders' equity = (beginning common stockholders' equity + ending common stockholders' equity)/2

Barco = (210000+78517+210000+102800)/2 = 300659

Kyan = (236000+103733+236000+113750)/2 = 344742

2A Price-Earnings Ratio

	Price-Earnings Ratio Company Choose Numerator: / Choose Denominator: = Price-Earnings Ratio Market price per common share / Earnings per share = Price-Earnings Ratio Barco $75 / $4.30 = 17.4 times Kyan $75 / $4.20 = 17.6 times

2A Dividend Yield

	(f) Dividend Yield Company Choose Numerator: / Choose Denominator: = Dividend Yield Annual cash dividends per share / Market price per share = Dividend Yield Barco $3.72 / $75 = 5.0 % Kyan $3.99 / $75 = 5.3 %

Part 2 B

Investment in Kyan company is the better investment as its profitability ratios are high which states investment in it will be more profitable.