You need to compare the performance of two companies, Ex$-$Co and Wye$-$Co$.$

Ex$-$Co had $$550,000$ in gross revenue for the reporting period and COGS of $$117,000.$ The cost of warranty was $$26,000.$ SG&A was $$83,000.$ There is no Other Income. The company has $$1,000,000$ in fixed assets that are three years old with the original expected life time of $10$ years and have no expected salvage value $($use straight$-$line depreciation$).$ Total Assets are $$765,350.$ Total Liabilities $($including current portion of long$-$term debt$)$ are $$162,500.$ The company has $$130,000$ in long$-$term financing at an interest rate of $5\mathrm{.}5\%.$ Ex$-$Co reported $$282,850$ in retained earnings, and has capital shares of $$320,000.$

Wye$-$Co had $$236,000$ in gross revenue in the reporting period. COGS was $$96,000,$ and SG&A was $$24,000.$ Due to ongoing manufacturing defects, there were warranty claims of $$28,000$ against gross revenue. Wye$-$Co took on new financing of $$60,000$ at the beginning of this period, on top of its other long$-$term debt of $$100,000.$ All of its financing is at an interest rate of $6\%.$ As of this reporting period, Wye$-$Co fixed assets are also three years ago, originally purchased for $$700,000$ with the original expected life time of $10$ years and expected to have no salvage value. Current Assets are $$55,500$; and Current Liabilities $($not including the current portion of the long$-$ term debt$)$ are $$32,500.$ Wye$-$Co has shareholder equity of $$320,000,$ and $$23,400$ in retained earnings.

a$)$ Based on this pre$-$tax financial information, tabulate the necessary income statement and balance sheet information, and calculate the leverage, total equity, and return on equity for each company.

b$)$ Which company has the lower leverage, based on the debt ratio?

c$)$ Which company has the better return on equity $($considering there is no income tax$)?$

d$)$ Which company is in the more secure operating performance position?

e$)$ Which company is in the more secure financial position?

f$)$ Which company would you recommend buying? Give three reasons for your recommendation.

 

Answer rating: 100% (QA)

Answers a ExCo Income Statement Gross Revenue 550000 COGS 117000 Warranty 26000 SGA 83000 Other Inco... View the full answer