Question

For JJ Incorporated:

Cash flows from assets = 300 dollars

EBIT (from 2019 INCOME STATEMENT)     =   300 dollars

depreciation expense (from  2019 INCOME STATEMENT )  =    40 dollars

taxes (from  2019 INCOME STATEMENT )  =  40

fixed assets from BALANCE SHEET dated December 31, 2018    =    1400 dollars

fixed assets from BALANCE SHEET dated December 31, 2019 =  1360 dollars

Additions to (Changes in) NWC  for 2019 =   0 dollars

For CAR Incorporated:

Cash flows from assets = 300 dollars

EBIT (from 2019 INCOME STATEMENT)     =   100 dollars

depreciation expense (from  2019 INCOME STATEMENT )  =    20 dollars

taxes (from  2019 INCOME STATEMENT )  =  40

fixed assets from BALANCE SHEET dated December 31, 2018    =    1400 dollars

fixed assets from BALANCE SHEET dated December 31, 2019 =  1160 dollars

Additions to (Changes in) NWC  for 2019 =   0 dollars

For JOJO Incorporated:

Cash flows from assets = 300 dollars

EBIT (from 2019 INCOME STATEMENT)     =   40 dollars

depreciation expense (from  2019 INCOME STATEMENT )  =    0 dollars

taxes (from  2019 INCOME STATEMENT )  =  20

fixed assets from BALANCE SHEET dated December 31, 2018    =    1400 dollars

fixed assets from BALANCE SHEET dated December 31, 2019 =  1120 dollars

Additions to (Changes in) NWC  for 2019 =   0 dollars

Based only on the numbers provided, which company is doing the “best” ?  In other words, if you were an individual investor, which company would you invest?

A. JJ  INCORPORATED

B. CAR  INCORPORTATED.

C. JOJO INCORPORATED

D. You are indifferent between JJ INCORPORATED and JOJO INCORPORATED  

E. You are indifferent amongst JJ INCORPORATED, CAR  INCORPORTATED, and  JOJO INCORPORATED

Answer 1

On the basis of given working below, we have higher cash flow ratio of JoJo but it's profit to average asset ratio is very lower. It may be possible that this cash is earned via sale of fixed asset hence return in long term may not be possible to get. Similarly to CAR . But in JJ we have good operating profit to average asset ratio. Also it's cash flow ratio is not bad. Hence investment in JJ is worthwhile option.

Option A is correct