Question

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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

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

Answer to Part 2:

Answer a.

Barco Company:

Profit Margin Ratio = Net Income / Net Sales
Profit Margin Ratio = $162,200 / $770,000
Profit Margin Ratio = 21.06%

Kyan Company:

Profit Margin Ratio = Net Income / Net Sales
Profit Margin Ratio = $210,400 / $880,200
Profit Margin Ratio = 23.90%

Answer b.

Barco Company:

Average Total Assets = ($445,440 + $398,000) / 2
Average Total Assets = $421,720

Total Asset Turnover = Net Sales / Average Total Assets
Total Asset Turnover = $770,000 / $421,720
Total Asset Turnover = 1.83 times

Kyan Company:

Average Total Assets = ($542,450 + $382,500) / 2
Average Total Assets = $462,475

Total Asset Turnover = Net Sales / Average Total Assets
Total Asset Turnover = $880,200 / $462,475
Total Asset Turnover = 1.90 times

Answer c.

Barco Company:

Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $162,200 / $421,720
Return on Total Assets = 38.46%

Kyan Company:

Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $210,400 / $462,475
Return on Total Assets = 45.49%

Answer d.

Barco Company:

Average Common Stockholders’ Equity = ($180,000 + $123,300 + $180,000 + $98,300) / 2
Average Common Stockholders’ Equity = $290,800

Return on Common Stockholders’ Equity = (Net Income - Preferred Dividends) / Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity = ($162,200 - $0) / $290,800
Return on Common Stockholders’ Equity = 55.78%

Kyan Company:

Average Common Stockholders’ Equity = ($206,000 + $142,150 + $206,000 + $93,600) / 2
Average Common Stockholders’ Equity = $323,875

Return on Common Stockholders’ Equity = (Net Income - Preferred Dividends) / Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity = ($210,400 - $0) / $323,875
Return on Common Stockholders’ Equity = 64.96%

Answer e.

Barco Company:

Price-Earnings Ratio = Market Price per share / Earnings per share
Price-Earnings Ratio = $75.00 / $4.51
Price-Earnings Ratio = 16.63

Kyan Company:

Price-Earnings Ratio = Market Price per share / Earnings per share
Price-Earnings Ratio = $75.00 / $5.11
Price-Earnings Ratio = 14.68

Answer f.

Barco Company:

Dividend Yield = Annual Cash Dividends per share / Market Price per share
Dividend Yield = $3.81 / $75.00
Dividend Yield = 5.08%

Kyan Company:

Dividend Yield = Annual Cash Dividends per share / Market Price per share
Dividend Yield = $3.93 / $75.00
Dividend Yield = 5.24%

Kyan Company would provide better investment.