The annual reports of Milano SpA, an Italian clothing chain, included the following selected data (in millions):

During each of the three years, 10 million shares of common stock were outstanding.

Assume that all sales were on account and that the applicable market prices per share of stock were € 90 for 20X1 and € 117 for 20X2.

1. Compute each of the following for each of the last two years, 20X1 and 20X2:

a. Rate of return on sales

b. Rate of return on stockholders’ equity

c. Current ratio

d. Ratio of total debt to stockholders’ equity

e. Ratio of current debt to stockholders’ equity

f. Gross profit rate

g. Average collection period for accounts receivable

h. P/E ratio

i. Dividend-payout percentage

j. Dividend yield

2. Answer yes or no to each of these questions and indicate which of the computations in number 1 support your answer:

a. Have business operations improved?

b. Has gross profit rate improved?

c. Has the rate of return on sales deteriorated?

d. Has the rate of return on owners’ investment increased?

e. Is there a decrease in the effectiveness of collection efforts?

g. Have the risks of insolvency changed significantly?

h. Has the market price of the stock become cheaper relative to earnings?

i. Has there been a worsening of the company’s ability to pay current debts on time?

j. Has there been a decline in the cash return on the market value of the capital stock?

k. Did the collectability of the receivables improve?

3. Basing your observations on only the available data and the ratios you computed, prepare some brief comments on the company’s operations and financial changes during the three years.

Transcribed Image Text:

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