Question

Required information Problem 13-5A Comparative ratio analysis LO A1, P3 (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 Kyan Company Barco Kyan Company Data from the current year-end balance sheets Company Company Data from the current year's income statement Sales $780,000 $905,200 644,500 17,000 24,990 218,710 4.84 4.00 Assets $ 19,500 $ 37,000 39,400 9,800 84,640 5,300 310,000 Cost of goods sold Interest expense Income tax expense Net income 585,100 8,100 14,992 171,808 5.05 Cash Accounts receivable, net Current notes receivable (trade) Merchandise inventory Prepaid expenses 55,400 8,000 132,500 7,650 304,400 Basic earnings per share Cash dividends per share Plant assets, net 3.73 Total assets $468,640 $544,950 Beginning-of-year balance sheet data Accounts receivable, net Current notes receivable (trade) Merchandise inventory Liabilities and Equity $ 28,800 $ 56,200 Current liabilities $ 69,340 $ 95,300 61,600 418,000 113,400 372,500 226,b00 82,800 103,000 Long-term notes payable Common stock, $5 par value Retained earnings 226,000 120,650 $468,640 $544,950 170,000 Total assets 146,500 Common stock, $5 par value 170,000 Total liabilities and equity Retained earnings 101,512 82,740 Problem 13-5 Part 2 2a. For both companies compute the (a) profit margin ratio, (b) total asset turnover, () return on total assets, and (d) return on common stockholders' equity. Assuming that share and each company's stock can be purchased at $100 per share, compute their (e) price- earnings ratios and (1 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

Solution of Part (A)

Profit Margin Ration is the percentage of profit earned on sales.

Formula to calculate profit margin ratio = (Net Income/Net Sales)*100

Values provided in the question are as follows:

Particulars	Barco Company	Kyan Company
Net Income	$ 171,808	$ 218,710
Sales	$ 780,000	$ 905,200

Using the values provided in question,

Profit Margin Ratio of Barco Company = (171,808/218,710)*100 = 78.56%

Profit Margin Ratio of Kyan Company = (780,000/905,200)*100 = 86.17%

Solution of Part (B)

Values provided in the question are as follows:

In the books of Barco Company:

Total Assets at the beginning of the year = $ 418,000

Total Assets at the end of the year = $ 468,640

Total Sales during the year = $ 780,000

In the books of Kyan Company:

Total Assets at the beginning of the year = $ 372,500

Total Assets at the end of the year = $ 544,950

Total Sales during the year = $ 905,200

Formula to calculate Total Asset Turnover is as follows:

Total Asset Turnover = Net Sales/Average Total Assets

Formula to calculate Average Total Assets is as follows:

Average Total Assets = (Total Assets at beginning of the year + Total Assets at the end of the year)/2

Using the above formulas Total Asset Turnover in case of Barco Company is as follows:

Average Total Assets = ($ 418,000 + $ 468,640)/2 = $ 443,320

Total Asset Turnover = $ 780,000/$ 443,320 = 1.76 Times

Using the above formulas Total Asset Turnover in case of Kyan Company is as follows:

Average Total Assets = ($ 372,500 + $ 544,950)/2 = $ 458,725

Total Asset Turnover = $ 905,200/$ 458,725 = 1.97 Time

Solution of Part (C)

Return on Total Asset Ratio is the percentage of profit earned on Total Assets

Values provided in the question are as follows:

In the books of Barco Company:

Total Assets at the beginning of the year = $ 418,000

Total Assets at the end of the year = $ 468,640

Net Income during the year = $ 171,808

In the books of Kyan Company:

Total Assets at the beginning of the year = $ 372,500

Total Assets at the end of the year = $ 544,950

Total Sales during the year = 218,710

Formula to calculate Return on Total Assets Ratio is as follows:

Return on Total Assets Ratio = (Net Income/Average Total Assets)*100

Formula to calculate Average Total Assets is as follows:

Average Total Assets = (Total Assets at beginning of the year + Total Assets at the end of the year)/2

Using the above formulas Total Asset Turnover in case of Barco Company is as follows:

Average Total Assets = ($ 418,000 + $ 468,640)/2 = $ 443,320

Return on Total Assets Ratio = ($ 171,808/$ 443,320)*100 = 38.75%

Using the above formulas Total Asset Turnover in case of Kyan Company is as follows:

Average Total Assets = ($ 372,500 + $ 544,950)/2 = $ 458,725

Return on Total Assets Ratio = ($ 218,710/$ 458,725)*100 = 47.68%

Solution of Part (D)

Return of Shareholder's Equity Ratio is percentage of net income on shareholder's equity amount.

Values provided in the question are as follows:

In the books of Barco Company:

Shareholder's Equity Fund = $ 170,000

Net Income during the year = $ 171,808

In the books of Kyan Company:

Shareholder's Equity Fund = $ 226,000

Net Income during the year = $ 218,710

Formula to calculate Return of Shareholder's Equity Ratio is as follows:

Return of Shareholder's Equity Ratio = (Net Income/Shareholder's Equity Fund)*100

Using the above formulas Return of Shareholder's Equity Ratio in case of Barco Company is as follows:

Return of Shareholder's Equity Ratio = ($ 171,808/$ 170,000)*100 = 101.06%

Using the above formulas Return of Shareholder's Equity Ratio in case of Kyan Company is as follows:

Return of Shareholder's Equity Ratio = ($ 218,710/$ 226,000)*100 = 96.77%

Solution of Part (E)

Price-Earnings (PE) Ratio is the Market price of share over earing per share

Values provided in the question are as follows:

In the books of Barco Company:

Market price of a share = $ 100

Earning per share = $ 5.05

In the books of Kyan Company:

Market price of a share = $ 100

Earning per share = $ 4.84

Formula to calculate Price-Earning Ratio is as follows:

Price-Earning Ratio = Market Price of Share/Earning per share

Using the above formulas Price-Earning Ratio in case of Barco Company is as follows:

Price-Earning Ratio = $ 100/$ 5.05 = 19.80 Times

Using the above formulas Price-Earning Ratio in case of Kyan Company is as follows:

Price-Earning Ratio = $ 100/$ 4.84 = 20.66 Times

Solution of part (F)

Dividend Yield is the ratio of Annual Dividend Received on a share over Market price of that share.

Values provided in the question are as follows:

In the books of Barco Company:

Market price of a share = $ 100

Dividend per share = $ 3.73

In the books of Kyan Company:

Market price of a share = $ 100

Dividend per share = $ 4.00

Formula to calculate Dividend Yield Ratio is as follows:

Dividend Yield Ratio = (Dividend per Share/Market Price of Share)*100

Using the above formulas Dividend Yield Ratio in case of Barco Company is as follows:

Dividend Yield Ratio = ($ 3.73/$ 100)*100 = 3.73%

Using the above formulas Dividend Yield Ratio in case of Kyan Company is as follows:

Dividend Yield Ratio = ($ 4.00/$ 100)*100 = 4.00%