Question

Lucy Lee is considering an investment in the common stock of a chain of retail department stores. She has narrowed her choice to two retail companies, Lucent Corporation and Ranbaxy Corporation, whose income statements and balance sheets follow.


During the year, Lucent paid a total of $200,000 in dividends. The market price per share of its stock is currently $120. In comparison, Ranbaxy paid a total of $456,000 in dividends, and the current market price of its stock is $152 per share. Lucent had net cash flows from operations of $1,086,000 and net capital expenditures of $2,500,000. Ranbaxy had net cash flows from operations of $1,970,000 and net capital expenditures of $4,200,000. 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.

Required
Conduct a comprehensive ratio analysis for each company, following the steps below. Compare the results. (Round to one decimal place, and consider changes of 0.1 or less to be indeterminate.)
1. Prepare an operating asset management analysis by calculating for each company the (a) current ratio, (b) quick ratio, (c) receivables turnover, (d) days’ sales uncollected, (e) inventory turnover, (f) days’ inventory on hand, (g) payables turnover, (h) days’ payable, and (i) financing period.
2. Prepare a profitability and total asset management analysis by calculating for each company the
(a) Profit margin,
(b) Asset turnover,
(c) Return on assets.
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 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.
5. Prepare an analysis of market strength by calculating for each company the
(a) price/earnings (P/E) ratio
(b) Dividend 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, Lucent, Ranbaxy, and Company with More Favorable Ratio. Indicate in the last column which company had the more favorable ratio in each case.
7. How could the analysis be improved if information about these companies’ prior years wereavailable?


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  • CreatedMarch 26, 2014
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