Comparing Alternative Investment Opportunities
The 2012 financial statements for the Price and Waterhouse companies are summarized here:
| Price Company | Waterhouse Company |
Balance Sheet |
|
|
Cash | $41,000 | $21,000 |
Accounts receivable (net) | 38,000 | 31,000 |
Inventory | 99,000 | 40,000 |
Operational assets (net) | 140,000 | 401,000 |
Other assets | 84,000 | 305,000 |
Total assets | $402,000 | $798,000 |
Current liabilities | $99,000 | $49,000 |
Long-term debt (10%) | 65,000 | 60,000 |
Capital stock (par $10) | 148,000 | 512,000 |
Contributed capital in excess of par | 29,000 | 106,000 |
Retained earnings | 61,000 | 71,000 |
Total liabilities and stockholders’ equity | $402,000 | $798,000 |
| Price Company | Waterhouse Company |
Income Statement | ||
Sales revenue (1/3 on credit) | $447,000 | $802,000 |
Cost of goods sold | (241,000) | (398,000) |
Expenses (including interest and income tax) | (161,000) | (311,000) |
Net income | $45,000 | $93,000 |
Selected data from the 2011 statements | ||
Accounts receivable (net) | $ 18,000 | $ 38,000 |
Inventory | 94,000 | 44,000 |
Long-term debt | 60,000 | 48,000 |
Other data | ||
Per share price at end of 2012 (offering price) | $ 17 | $ 15 |
Average income tax rate | 30% | 30% |
Dividends declared and paid in 2012 | $ 33,000 | $148,000 |
The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Waterhouse is more conservative, and as its president has said, “ We avoid what we consider to be undue risk.” Neither company is publicly held. Price Company has an annual audit by a CPA but Waterhouse Company does not.
Required:
1. Complete a schedule that reflects a ratio analysis of each company. Compute the ratios discussed in the chapter.
2. A client of yours has the opportunity to buy 10 percent of the shares in one or the other company at the per share prices given and has decided to invest in one of the companies. Based on the data given, prepare a comparative written evaluation of the ratio analyses (and any other available information) and give your recommended choice with the supporting explanation.
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