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Assume that you considering purchasing stock as an investment

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Question;Assume that you considering purchasing stock as an investment. You have narrowed the choice to Disc.Com and We-Shop shopping and have assembled the following data. See upload files).Your strategy to invest in companies that have low price earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other investors and that your decision demands on the results of ratio analysis.Data TableSelected balance sheet and market-price data at end of current year:Disc.com We-shop ShoppingCurrent assets:Cash............................. $ 22,000 $ 36,000Short-term investments.............. 9,000 14,000Current receivables, net.............. 184,000 167,000 Inventories........................ 209,000 185,000Prepaid expenses.................. 17, 000 11, 000 Total current assets................. $ 441,000 $ 413,000 Total assets.......................... 977,000 930,000Total current liabilities.................. 367,000 334,000Total liabilities........................ 673,000 689,000Preferred stock: 9%, $125 par............ 25,000 Common stock, $1par (150,000 shares)... 150,000$5 par (15,000 shares)..... 75,000 Total stockholders'equit)t............... 304,000 241,000 Market price per share of common stock... $ 4.92 $ 45.22Page 1Data TableSelected balance sheet data at beginning of current year:Balance sheet:Disc.com We-shop ShoppingCurrent receivables, net................ $Inventories...........................Total assets..........................Long-term debt....................... Preferred stock, 9%, $125 par............ Common stock,$1 par (150,000 shares)...$5 par (15,000 shares)..... Total stockholders' equity...............143,000 $212,000853,000150,000265,000192,000199,000908,000304,00025,00075,000222,000Page 1FORMULAa. Quick acid test: cash + st. invest + current rec /current liabilitiesb. Inventory Turnover:cogs I avg inventory.c. Day sales in avg. receivables: avg rec I inventory one day sale.(Round final answer to wholenumbers).d. Debt ratio: total liab I total assets.e. Time interest earned ratio: income from operations I interest expense.f. Return on common stockholders equity: net income - preferred dividends /average common equity.g. Earnings per share common stock:net income - preferred dividends / common shares o/s.h. Price earnings ratio: market price per share /earnings per share. (Round RE to nearestwhole dollar.NOTE: Include numbers when solving each ratio for example: Quick acid test:400,000 + 500,000 I100000 = answerFOR a,b,d,e,f and g round the ration to two decimal places. Thanks.Data TableSelected income statement data for the current year:Disc.com We-shop ShoppingNet sales {all on credit)............... $ 599,000 $ 515,000Cost of goods sold.................. 458,000 386,000Income from operations............... 88,000 78,000Interest expense.................... 14,000Net income........................ 62,000 38,000Page 1Requirements1. Compute the following ratios for both companies for the current year and decide which company'sstock better fits your investment strategy.a. Quick (acid-test) ratiob. Inventory turnoverc. Days' sales in average receivablesd. Debt ratioe. Times-interest-earned ratiof. Return on common stockholders' equityg. Earnings per share of common stockh. Price/earnings ratio2. Compute each company's economic-value-added (EVA) measure and determine whether the companies'EVAs confirm or alter your investment decision. Each company's cost of capital is 12%.Page 1

 

Paper#39401 | Written in 18-Jul-2015

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