Question

Presented below are condensed financial statements adapted from those of two actual companies competing as the primary players in a specialty area of the food manufacturing and distribution industry. ($ in millions, except per share amounts.)

Balance Sheets
	Metropolitan				Republic
Assets
Cash	$	289.3			$	43.3
Accounts receivable (net)		522.7				423.0
Short-term investments		—				8.5
Inventory		572.4				725.2
Prepaid expenses and other current assets		225.6				587.7
Current assets	$	1,610.0			$	1,787.7
Property, plant, and equipment (net)		2,707.2				2,712.9
Intangibles and other assets		306.3				610.6
Total assets	$	4,623.5			$	5,111.2
Liabilities and Shareholders’ Equity
Accounts payable	$	581.9			$	794.2
Short-term notes		323.1				652.4
Accruals and other current liabilities		694.2				628.5
Current liabilities	$	1,599.2			$	2,075.1
Long-term debt		658.6				662.3
Deferred tax liability		482.6				712.7
Other long-term liabilities		223.0				205.1
Total liabilities	$	2,963.4			$	3,655.2
Common stock (par and additional paid-in capital)		238.9				448.0
Retained earnings		2,574.9				1,702.9
Less: Treasury stock		(1,153.7	)			(694.9	)
Total liabilities and shareholders’ equity	$	4,623.5			$	5,111.2
Income Statements
Net sales	$	5,803.0			$	7,866.2
Cost of goods sold		(2,811.0	)			(4,380.7	)
Gross profit	$	2,992.0			$	3,485.5
Operating expenses		(1,636.7	)			(2,924.2	)
Interest expense		(88.8	)			(43.6	)
Income before taxes	$	1,266.5			$	517.7
Income tax expense		(288.7	)			(28.1	)
Net income	$	977.8			$	489.6
Net income per share	$	1.8			$	7.8

Evaluate and compare the two companies by responding to the following questions.

Note: Because comparative statements are not provided you should use year-end balances in place of average balances as appropriate.

Required:
1. For both companies, compute the ratios below.
2. Evaluate and compare the two companies.

For both companies, compute the ratios below. (Consider 365 days a year. Do not round intermediate calculations and round your final answers to 2 decimal places.)

	Metropolitan Republic Return on Assets % % Profit Margin % % Asset Turnover times times Return on Equity % % Equity Multiplier Acid-Test Ratio Current Ratio Receivables Turnover times times Inventory Turnover times times Times Interest Earned times times

Evaluate and compare the two companies.

Analysis Which of the two firms had greater earnings relative to resources available? Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover? From the perspective of a common shareholder, which of the two firms provided a greater rate of return? Which company has made the most effective use of financial leverage? Of the two companies, which appears riskier in terms of its ability to pay short-term obligations? Which of the two companies manages their current assets more efficiently? From the perspective of a creditor, which company offers the most comfortable margin of safety in terms of its ability to pay fixed interest charges?

Answer 1

Ton metropolitan assel Return on Nelinurme Total asek 971.8 xlco 4623.5 = 21.149. Beshit mange Netiname 977.8 Net sales x100 5803.0 16.844. Asset turnover Net sales 5803.0 ples Total asseti 4623.5 1.25 times Return on intes intent equity -- Net income total equity 977.8 X lo 1660.1 I total equity = 58.90%. - Total Assed - Total liability - 4623.5 - 2963.4 1660.1 ③ Equity multiplier Total asset 4623.5 total equity 16601 - 2.78 16 Acid test ratio 6 liquid assete 1619 = Loob' X549.2 quicle liability liquid asset tash and tash equivalent & Account Remobles 289.3 + 522.7 1599.2 1599.2 812 0.50

Current Retio Current assete Chersent vability 1610.0 1599.2 - 1.00 Receitable lave inventary (8) Reninable turnover = Net sales 5803.0 Account Receivables 522.7 11.10 times Inventory twrnover = Cost of goods sold inventory 2811.0 572.4 4.91 time (16) Times interest earned a Farning before tax interest tax expenses 1266.5 88.8 = 14.26 times For Republic Return on Assets Net income tolal asset 489.6 -x100 5111.2 9.57Y, @ Rufit margir Net income 489.6 Net Sales X leo 7866.2 = 6.22% .