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. Barco Kyan Company Company Data from the current year-end balance sheets Assets Cash $ 22,000 $ 35,000 Accounts receivable, net 33,400 51,400 Merchandise inventory 84,640 134,500 Prepaid expenses 5,900 7,650 Plant assets, net 360,000 306,400 Total assets $505,940 $534,950 Barco Kyan Company Company Data from the current year's income statement Sales $770,000 $912, 200 Cost of goods sold 590,100 638,500 Interest expense 8,400 13,000 Income tax expense 14,800 25,183 Net income 156,700 235,517 Basic earnings per share 3.92 4.99 Cash dividends per share 3.81 3.92 Liabilities and Equity Current liabilities Long-term notes payable Common stock, $5 par value Retained earnings Total liabilities and equity $ 70,340 $101,300 80,800 107,000 200,000 236,000 154,800 90,650 $505,940 $534,950 Beginning-of-year balance sheet data Accounts receivable, net Merchandise inventory Total assets Common stock, $5 par value Retained earnings $ 25,800 $ 54,200 61,600 105,400 458,000 382,500 200,000 236,000 150,500 40,157 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 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

jas Profit margin Ratio Profit Margin Ratio Company Choose Numerator / Choope denominator = Met Income I Met sales Barco $ 156,700 2 $770,000 Kyan $ 235,517 / $912,200 = 11 Profit margin Ratio 20.35 25.82 11 % % by | Total Asset Turnover Company Choos Numerator / Choose denominator = Total Asset Turnover. Net sales / Average Total Assets - Total Asset Turnover Barco $770,000 $481,970 = 1.60 times kyan $912,200 / $458,725 = 1.99 times Calculation: Average Total Assets =/(Beginning total assets & Ending total assets) + 27 Barco: Average total Assets = (($458,000 + $505,940) = 2] = $963,940 = 2 = $481,970 Kyan: Average total Assets={($382,500 + $534,950) = 2) - $917, uso : 2 & $458,725

Return on Total Assets Return on Company Choose Numerator / Choose Denominator = Total Assets Average Total Return on Met Income Ausets = Yotal Assets Barco $ 156,700 / $ 40,970 = 32.51 Kyan $ 235,517 I $ 458,725 = 51.34 7 Note: Average total assets are calculated above in past (6) Company Leds L Return on common stockholders' Equity Choose Return on Choon Numerator / Denominator common wtockholders' F equity Met Preferred Average Common Return on common Income I Dividends! Stockholders' Equity - stockholders' equity Barco $156,700 - $0 / $352,650 = 44.43 % [Kyan $235,517 -1 0 1 $301, you = 78.14 % Calculation: Average common stockholders' Equity = [(Beginning common stock + Beginning Retained earnings & Ending Common Stock & Ending Retained Earnings) # 2] Barco: Average common stockholders Equity = ($200,000 + $ 150,500+ $ 200,000f $154,800) +27 = $705,300 + 2 = $352,650

Ryan: Average common stockholders' Equity $ 236,000+ $40,157+ $ 236,000+ $90,650) = 2) = $602,807 + 2 = $301,403.5 or $301,404 Price - Earnings Ratio Price - Earnings Company Choose Numerator / Choose Denominator & Ratio Market Price Earnings per Price - Earnings Per Common Share Ratie Barco $75 / $3.92 19.13 times kyan $75 / $4.99 15.03 times le) Share Dividend rields Choose Company Choose Numerator T/Denominator Annual cash dividend Market Price fer Share fer share Barco $ 3.81 / $75 kyan $3.92 $75 Dividend - Yield dividend a Yield = 5.08 = 5. 23 % (2b) The better investment Kyan Company