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Assume you are purchasing an investment

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Assume you are purchasing an investment and decide to invest in a company in the home remodeling business. You narrow the choice to Build It Right, Inc., or Structurally Sound Corp. You assemble the following selected data;Selected income statement data for the current year;Build It Right, Inc. Structurally Sound Corp.;Net sales (all on credit) $298.000 $223,000;Cost of goods sold 155,000 125,000;Income from operations 83,000 47,000;Interest expense 13,000 ------;Net income 43,000 29,000;Selected balance sheet and market price data at the end of the current year;Build It Right, Inc. Structurally Sound Corp.;Current assets;Cash $12,000 $13,000;Short-term investments 11,000 12,000;Accounts receivable, net 28,000 25,000;Inventory 60,000 52,000;Prepaid expenses 2,000 1,000;Total current assets 113,000 103,000;Total assets 197,000 159,000;Total current liabilities 59,000 65,000;Total liabilities 79,000 65,000;Preferred stock, 5%, $100 par 20,000 -----;Common stock, $1.00 par, 6,000 shares --- 6,000;$2.50 par, 3,000 shares 7,500 -----;Total stockholders' equity 118,000 94,000;Market price per share of common stock $67 $31;Selected balance sheet data at the beginning of the current year;Build It Right, Inc. Structurally Sound Corp.;Accounts receivable, net $29,000 $24,000;Inventory 53,000 56,000;Total assets 162,000 155,000;Preferred stock, 5%, $100 par 20,000 -----;Common stock, $1.00 par, 6,000 shares ----- 6,000;$2.50 par, 3,000 shares 7,500 ------;Total stockholders' equity 76,000 71,000;Your investment strategy is to purchase the stock of the company that has a low price/earnings ratio but appears to be in good shape financially. Assume that you analyzed all other factors and your decision depends in the results of the ratio analysis to be performed.;Requirements;1. Compute the following ratios for both companies for the current year, and decide which company's stock better fits your investment strategy.;a. Quick ratio;b. Inventory turnover;c. Days' sales in average receivables;d. Debt ratio;e. Earnings per share of common stock;f. Price/earnings ratio;2. Compute the EVA for each company, assuming a 10% cost of capital. Does the EVA confirm the opinion you formed as a result of the ratio analysis?

 

Paper#81566 | Written in 18-Jul-2015

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