Two companies competing in the same industry are being evaluated by a bank that can lend money to only one of them. Summary information from the financial statements of the two companies follows:

a. Compute the current ratio, acid-test ratio, accounts receivable turnover, inventory turnover, days’ sales in inventory, and days’ sales in receivables for both companies. Identify the company that you consider to be the better short-term credit risk and explain why.
b. Compute the net profit margin, total asset turnover, return on total assets, and return on common stockholders’ equity for both companies. Assuming that each company paid cash dividends of $1.50 per share and each company’s stock can be purchased at $25 per share, compute their price-earnings ratios and dividend yields.
Identify which company’s stock you would recommend as the better investment and explainwhy.

  • CreatedJanuary 22, 2015
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