Using Ratios to Compare Alternative Investment Opportunities The 2007 financial statements for Armstrong and Blair companies are
Question:
Using Ratios to Compare Alternative Investment Opportunities
The 2007 financial statements for Armstrong and Blair companies are summarized here:
| Armstrong Company | Blair Company |
Balance Sheet |
|
|
Cash | $ 35,000 | $ 22,000 |
Accounts receivable (net) | 40,000 | 30,000 |
Inventory | 100,000 | 40,000 |
Property and equipment (net) | 180,000 | 300,000 |
Other assets | 45,000 | 408,000 |
Total assets | $400,000 | $800,000 |
Current liabilities | $ 100,000 | $ 50,000 |
Long-term debt | 60,000 | 370,000 |
Total liabilities | 160,000 | 420,000 |
Common stock (par $10) | 150,000 | 200,000 |
Additional paid-in capital | 30,000 | 110,000 |
Retained earnings | 60,000 | 70,000 |
Total liabilities and stockholders’ equity | $400,000 | $800,000 |
Income Statement |
|
|
Sales revenue (1/3 on credit) | $450,000 | $ 810,000 |
Cost of goods sold | (245,000) | (405,000) |
Expenses (including interest and income tax) | (160,000) | (315,000) |
Net income | $ 45,000 | $ 90,000 |
Selected Data from 2005 Statements |
|
|
Accounts receivable (net) | $ 20,000 | $ 38,000 |
Inventory | 92,000 | 45,000 |
Property and equipment (net) | 180,000 | 300,000 |
Long-term debt | 60,000 | 70,000 |
Total stockholders’ equity | 231,000 | 440,000 |
Other Data |
|
|
Estimated value of each share at end of 2006 | $ 18 | $ 27 |
Average income tax rate | 30% | 30% |
Dividends declared and paid in 2006 | $ 36,000 | $ 150,000 |
The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, “We avoid what we consider to be undue risk.” Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. Neither company is publicly held. Blair Company has an annual audit by a CPA but Armstrong Company does not.
Required:
1. Calculate the ratios in Exhibit 13.4 for which sufficient information is available. Round all calculations to two decimal places.
TIP: To calculate EPS, use the balance in the common stock account to determine the number of shares outstanding. The common stock balance includes the par value per share times the number of shares.
2. A client of yours has decided to buy shares in one of the two companies. Based on the data given, prepare a comparative written evaluation of the ratio analyses (and any other available information) and conclude with your recommended choice.
TIP: Comment on how accounting differences affect your evaluations, if at all.
Fundamentals of Financial Accounting
ISBN: 978-0078025372
4th edition
Authors: Fred Phillips, Robert Libby, Patricia Libby