Question: PROBLEM 114 The following financial data are available for each of two manufacturers of mountain bikes. AXEL BIKE Capital structure 5%, 20-year notes ............................................. $10,000,000
PROBLEM 11–4 The following financial data are available for each of two manufacturers of mountain bikes.
AXEL BIKE Capital structure 5%, 20-year notes ............................................. $10,000,000 —
Common equity .................................................. $20,000,000 $30,000,000 Number of common shares ................................ 500,000 750,000 Earnings per share Year 6................................................................. $ 4.25 $ 3.00 Year 5................................................................. 3.50 2.50 Year 4................................................................. 2.25 1.67 Year 3................................................................. 2.75 2.00 Year 2................................................................. 1.70 1.95 Sales (Year 6) ......................................................... 30,000,000 30,000,000 Net income (Year 6) ................................................ 2,125,000 2,250,000 AXEL BIKE Selected balance sheet data at end of Year 6 Cash and cash equivalents................................ $ 3,000,000 $ 5,850,000 Accounts receivable ........................................... 5,000,000 3,750,000 Inventories ......................................................... 12,000,000 10,000,000 Total current assets ........................................... 20,000,000 19,600,000 Accounts payable............................................... 4,000,000 3,500,000 Accrued expenses............................................... 2,000,000 2,000,000 Taxes payable..................................................... 1,000,000 1,100,000 Total current liabilities....................................... 7,000,000 6,600,000 Plant and equipment, net .................................. 13,000,000 15,900,000 Patents, net ....................................................... 4,000,000 100,000 Required:
Compute and analyze each of the following seven factors and ratios. For each factor and ratio, does the evidence imply a higher or lower PE for Axel or Bike?
a. Growth in earnings per share.
e. Current ratio, receivables turnover, and sales to plant and equipment.
b. Financial leverage ratio.
f. Patent position.
c. Return on common equity. g. Return on long-term assets.
d. Net income as % of sales.
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