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:    

    

 

Required :

 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 explain why.

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Datatech Sigma Company Company Datatech Sigma Company Company Data from the current year-end balance sheet: Data from the current year's income statement: Assets Sales $660,000 $780,200 Cash $ 18,500 $ 33,000 Cost of goods sold Interest expense 6,200 Income tax expense 485,100 6,900 12,800 532,500 Accounts receivable, net Notes receivable (trade) Merchandise inventory Prepaid expenses Plant and equipment, net 36,400 8,100 83,440 11,000 19,300 56,400 131,500 Net income 67,770 105,000 4,000 5,950 Basic earnings per share 1.94 2.56 284,000 303,400 Total assets $434,440 $536,450 Datatech Sigma Datatech Sigma Company Company Company Company Beginning-of-year data: Liabilities and Stockholders' Equity $ 28,800 $ 53,200 Accounts receivable, net $ 60,340 $ 92,300 Notes receivable (trade) 100,000 Merchandise inventory Current liabilities . Long-term nates payable 79,800 54,600 106,400 Common stock, $5 par value Retained earnings 175,000 205,000 Total assets 388,000 175,000 372,500 205,000 119,300 139,150 Common stock, $5 par value Total liabilities and equity $434,440 $536,450 Retained eamings 94,300 90,600 Datatech Sigma Company Company Datatech Sigma Company Company Data from the current year-end balance sheet: Data from the current year's income statement: Assets Sales $660,000 $780,200 Cash $ 18,500 $ 33,000 Cost of goods sold Interest expense 6,200 Income tax expense 485,100 6,900 12,800 532,500 Accounts receivable, net Notes receivable (trade) Merchandise inventory Prepaid expenses Plant and equipment, net 36,400 8,100 83,440 11,000 19,300 56,400 131,500 Net income 67,770 105,000 4,000 5,950 Basic earnings per share 1.94 2.56 284,000 303,400 Total assets $434,440 $536,450 Datatech Sigma Datatech Sigma Company Company Company Company Beginning-of-year data: Liabilities and Stockholders' Equity $ 28,800 $ 53,200 Accounts receivable, net $ 60,340 $ 92,300 Notes receivable (trade) 100,000 Merchandise inventory Current liabilities . Long-term nates payable 79,800 54,600 106,400 Common stock, $5 par value Retained earnings 175,000 205,000 Total assets 388,000 175,000 372,500 205,000 119,300 139,150 Common stock, $5 par value Total liabilities and equity $434,440 $536,450 Retained eamings 94,300 90,600

Answer rating: 100% (QA)

a Current Ratio Total current assetstotal current liabilities cash AR NR Inventory Prepaid expenses ... View the full answer