Question

Westfield Capital Management Co.’s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry’s Departmental Stores (JDS) or Miller Stores (MLS). Selected financial data for both companies follow:


Required:
a. Compute each of the following ratios for both JDS and MLS:
(1) Price-to-book ratio
(2) Total-debt-to-equity ratio
(3) Fixed-asset-utilization (turnover)
b. Select the company that better meets Westfield’s criteria.
c. The following information is from these companies’ notes as of March 31, 2006:
(1) JDS conducts a majority of its operations from leased premises. Future minimum lease payments (MLP) onnoncancellable operating leases follow ($ millions):
MLP
2007. . . . . . . . . . . . $ 259
2008. . . . . . . . . . . . . 213
2009. . . . . . . . . . . . . 183
2010. . . . . . . . . . . . . 160
2011. . . . . . . . . . . . . 155
2012 and later . . . . . 706
Total MLP. . . . . . $1,676
Less interest. . . . . (676)
Present value of MLP. . . $1,000
Interest rate. . . . . . . . . . 10%
(2) MLS owns all of its property and stores.
(3) During the fiscal year ended March 31, 2006, JDS sold $800 million of its accounts receivable with recourse, all of which was outstanding at year-end.
(4) Substantially all of JDS’s employees are enrolled in company-sponsored defined contribution plans. MLS Sponsors a defined benefits plan for its employees. The MLS pension plan assets’ fair value is $3,400 million. No pension cost is accrued on its balance sheet as of March 31, 2006 (note that MLS accounts for its pension plans under SFAS 87). The details of MLS’s pension obligations follow:


Compute all three ratios in part (a) after making necessary adjustments using the note information. Again, select the company that better meets Westfield’s criteria. Comment on your decision in part (b) relative to the analysishere.


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  • CreatedJanuary 22, 2015
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