(L. OBJ. 4) Using ratios to decide between two stock investments [45-60 min] Assume tha...

(L. OBJ. 4) Using ratios to decide between two stock investments [45-60 min]

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Digital Plus. Corp., and Very Network, Inc., and have assembled the following data:

Selected income-statement data for the current year

Selected balance-sheet and market-price data at the end of the current year

Selected balance-sheet data at the beginning of the current year

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Requirement

1. Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy.

a. Acid-test ratio

b. Inventory turnover

c. Days’ sales in average receivables

d. Debt ratio

e. Earnings per share of common stock

f. Price/earnings ratio