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 Barco Kyan Company Company Company 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,boo 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 Canh dividenda per share 3.81 3.93 Liabilities and Equity Current liabilities Beginning-of-year balance sheet data $ 61,340 $ 93,300 Accounts receivable, net $ 29,800 $ 54,100 Long-term notes payable 80,800 101,000 Merchandise Inventory 55,600 Common stock, 55 par value 107,400 180,000 206,000 Total assets 398,000 382,00 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. (return on total assets, and (c) 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 (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. Complete this question by entering your answers in the tabs below. 2A Prof Mar Ratio 2A Tot Asset 2A Ret on Tot Assets Turn 2A Ret On Com Stock 2A Price Earn Ratio 2A Div Yield Reg 28 For both companies compute the profit margin ratio. (a) Company Choose Numerator Profit Margin Ratio Choose Denominator: - Profit margin ratio Profit margin ratio Barco

Answer 1

2A) a) Profit margin ratio = Net Income / Sales Revenue Barco : 162,200 / 770,000 = 21.06% Kyan : 210,400 / 880,200 = 23.90% Kyan > Barco b) Barco : Average Total Assets = (398,000 + 445,440)/2 = 421,720 Kyan : Average Total Assets = (382,500 + 542,450)/2 = 462,475 Total Assets Turnover = Sales Revenue/Average Total Assets Barco : 770,000 / 421,720 = 1.83 Kyan: 880,200 / 462,475 = 1.90 Kyan > Barco c) Barco : EBIT = 162,200 + 14,800 + 7,900 = 184,900 Kyan: EBIT = 210,400 + 24,300 + 13,000 = 247,700 Return on total assets = EBIT / Average Total Assets Barco: 184,900 / 421,720 = 43.84% Kyan : 247,700 / 462,475 = 53.56% Kyan > Barco d) Barco: Average common stockholders' equity = (180,000 + 180,000)/2 = 180,000 Kyan: Average common stockholders' equity = (206,000 + 206,000)/2 = 206,000 Return on common stockholders' equity = (Net income - Dividend on preferred stock) / Average common stockholders' equity Barco : (162,200 - 0)/180,000 = 90.11% Kyan: (210,400 - 0) / 206,000 = 102.14% Kyan > Barco

e) Price-Earnings ratio = Current share price / Earnings per share Barco : 75 / 4.51 = 16.63 times Kyan: 75/5.11 = 14.68 times Kyan < Barco f) Dividend Yield = Dividend per share / Current share price Barco : 3.81 / 75 = 5.08 Kyan : 3.93/ 75 = 5.24 Kyan > Barco 2B) Out of the six ratios computed above, 5 ratios are in favour of Kyan and only one ratio is in favour of Barco. Thus, from the above observation, investment in Kyan company stock is recommended.