Question

Summary information from the financial statements of two companies competing in the same industry follows.

	Barco Company			Kyan Company					Barco Company			Kyan Company
Data from the current year-end balance sheets								Data from the current year’s income statement
Assets								Sales	$	800,000		$	926,200
Cash	$	18,500		$	34,000			Cost of goods sold		594,100			642,500
Accounts receivable, net		39,400			53,400			Interest expense		8,400			15,000
Current notes receivable (trade)		9,700			7,400			Income tax expense		15,377			25,570
Merchandise inventory		84,540			134,500			Net income		182,123			243,130
Prepaid expenses		5,400			7,500			Basic earnings per share		4.34			6.20
Plant assets, net		290,000			310,400			Cash dividends per share		3.76			3.94
Total assets	$	447,540		$	547,200
								Beginning-of-year balance sheet data
Liabilities and Equity								Accounts receivable, net	$	30,800		$	51,200
Current liabilities	$	60,340		$	99,300			Current notes receivable (trade)		0			0
Long-term notes payable		79,800			109,000			Merchandise inventory		53,600			109,400
Common stock, $5 par value		210,000			196,000			Total assets		388,000			372,500
Retained earnings		97,400			142,900			Common stock, $5 par value		210,000			196,000
Total liabilities and equity	$	447,540		$	547,200			Retained earnings		73,197			54,218

2a. For both companies compute the (a) profit margin ratio, (b) total asset turnover, (c) return on total assets, and (d) return on common stockholders’ equity. Assuming that share and each company’s stock can be purchased at $80 per share, compute their (e) price-earnings ratios and (f) 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.

Answer 1

(1)

profit margin ratio = net income/sales

for Barco company,

= $182123/$800000

= 22.77%

for Kyan company,

= $243130/$926200

= 26.25%

(2)

total assets turnover = sales/average total assets

for Barco company,

= $800000/{($447540 + $388000)/2}

= 1.91 times

For Kyan company,

= $926200/{($547200 + $372500)/2}

= 2.01 times

(3)

return on total assets = earning before interest & taxes/average total assets

for Barco company,

= ($800000 - $594100)/{($447540 + $388000)/2}

= 49.29%

for Kyan company,

= ($926200 - $642500)/{($547200 + $372500)/2}

= 61.69%

(4)

Return on common stockholders equity = (net income - preferred dividends)/average common stockholders equity

Common stockholders equity = common stock + retained earnings

for Barco company,

Average common stockholders equity = {($210000 + $97400) + ($210000 + $73197)}/2 = $295298.50

Therefore,

Return on common stockholders equity = ($182123 - 0)/$295298.50

= 61.67%

for Kyan company,

Average common stockholders equity = {($196000 + $142900) + ($196000 + $54218)}/2 = $294559

Therefore,

Return on common stockholders equity = ($243130 - 0)/$294559

= 82.54%