Question

Kevin Wolfer is considering an investment in the common stock of a chain of retail department stores. He has narrowed his choice to two retail companies, Roma Corporation and LimaCorporation, whose income statements and balance sheets follow.
During the year, Roma Corporation paid a total of $50,000 in dividends. The market price per share of its stock is currently $60. In comparison, Lima Corporation paid a total of $114,000 in dividends, and the current market price of its stock is $76 per share. Roma Corporation had net cash flows from operations of $271,500 and net capital expenditures of $625,000. Lima Corporation had net cash flows from operations of $492,500 and net capital expenditures of $1,050,000. Information for prior years is not readily available. Assume that all notes payable are current liabilities and all bonds payable are long-term liabilities and that there is no change in inventory.

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REQUIRED
Conduct a comprehensive ratio analysis for each company, following the steps outlined below. Compare the results. ( Round percentages and ratios to one decimal place and consider changes of 0.1 or less to be indeterminate.)
1. Prepare a profitability and total asset management analysis by calculating for each company the
(a) Profit margin,
(b) Asset turnover
(c) Return on assets.
2. Prepare a liquidity analysis by calculating for each company the
(a) Cash flow yield,
(b) Cash flows to sales,
(c) Cash flows to assets,
(d) Free cash flow.
3. Prepare a financial risk analysis by calculating for each company the
(a) Debt to equity ratio,
(b) Return on equity,
(c) Interest coverage ratio.
4. Prepare an operating asset management analysis by calculating for each company
(a) Inventory turnover,
(b) Days’ inventory on hand,
(c) Receivable turnover,
(d) Days’ sales uncollected,
(e) Payables turnover,
(f) Days’ payable,
(g) Current ratio,
(h) Quick ratio.
5. Prepare a market strength analysis by calculating for each company the
(a) Price/earnings (P/E) ratio
(b) Dividends yield.
6. Compare the two companies by inserting the ratio calculations from 1 through 5 in a table with the following column headings: Ratio Name, Roma, Lima, and Company with More Favorable Ratio. Indicate in the last column which company had the more favorable ratio in each case. (Note: Consider changes of 0.1 or less to be neutral.)
7. How could the analysis be improved if information about these companies’ prior years were available?




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  • CreatedSeptember 10, 2014
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