Question

Summary information from the financial statements of two companies competing in the same industry follows. areo Kyan Company Company Data from the current year-end balance sheets Assets Cash $ 21.000 1.000 Accounts receivable, not 37,400 54,400 Current notes receivable (trade) 9.800 8.200 Merchandise inventory 84.840 134.500 Prepaid expenses 6,200 7,850 Plant assets, bet 290,000 306,400 Total assets $449,240 $542,350 Barco Kyan Company Company Data from the current year'. Income statement Sales $800,000 $920,200 Cont of goods sold 587,100 634,500 Interest expense 8.300 11,000 Income tax expense 15.377 25,404 Net income 189,223 249,296 Basie earnings per share 4.30 5.28 Cash dividende per share 3.95 $ 26,800 $58.200 Liabilities and Equity Current liabilities Long-term notas payable Common stock, $5 par value Retained earnings Total liabilities and equity $ 68,340 $ 94,300 79.800 113,000 220,000 236,000 81,100 99,050 $449,240 $542,350 Beginning-of-year balance sheet data Accounts receivable, net Current notes receivable (trade) Merchandise inventory Total assets Common stock, $5 par value Retained earnings 65.600 398,000 220,000 59,077 111.400 422,500 236.000 36,194 2a. For both companies compute the () profit margin ratio. (b) total asset turnover, (return on total assets, and (d) return on common stockholders' equity. Assuming that share and each company's stock can be purchased at $70 per share, compute their (e) price- earnings ratios and ( dividend yields. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) 2b. Identify which company's stock you would recommend as the better investment. Complete this question by entering your answers in the tabs below. 2A Price Ear 2A Di Yield Ratio Red 28 2A Reton 2A Pro Marg ZA Tot Asset 2A Ret on Tot Com Stock Ratio Turn Assets Equity For beth companies compute the profit margin ratio. Profit Margin Ratio Choose Denominator Company Choose Numerator Profit marain ratio < Prev 9 of 9 Next

can you please explain how to get the answers as well? that would be great! Thank you!

Answer 1

2. A.

a.

Profit Margin Ratio
Company	Choose Numerator	/	Choose Denominator	=	Profit Margin Ratio
	Net Income	/	Sales	=	Profit Margin Ratio
Barco	189,223	/	800,000	=	23.65 %
Kyan	249,296	/	920,200	=	27.09 %

b.

Total Asset Turnover
Company	Choose Numerator	/	Choose Denominator	=	Total Asset Turnover
	Sales	/	Average Total Assets	=	Total Asset Turnover
Barco	800,000	/	423,620	=	1.89 times
Kyan	920,200	/	482,425	=	1.91 times

c.

Return on Total Assets
Company	Choose Numerator	/	Choose Denominator	=	Return on Total Assets
	Net Income	/	Average Total Assets	=	Return on Total Assets
Barco	189,223	/	423,620	=	44.67 %
Kyan	249,296	/	482,425	=	51.68 %

d.

Return on Common Stockholders Equity
Company	Choose Numerator	/	Choose Denominator	=	Return on Common Stockholders Equity
	Net Income	/	Average Total Common Stockholders Equity	=	Return on Common Stockholders Equity
Barco	189,223	/	290,089	=	65.23 %
Kyan	249,296	/	303,622	=	82.11 %

e.

Price Earnings Ratio
Company	Choose Numerator	/	Choose Denominator	=	Price Earnings Ratio
	Market Price of Share	/	Earnings per Share	=	Price Earnings Ratio
Barco	70	/	4.30	=	16.28
Kyan	70	/	5.28	=	13.26

f.

Dividend Yield
Company	Choose Numerator	/	Choose Denominator	=	Dividend Yield
	Dividends per Share	/	Market Price per Share	=	Dividend Yield
Barco	3.80	/	70	=	5.43 %
Kyan	3.95	/	70	=	5.64 %

2.B. It is recommended that investment should be made in Kyan Company. Not only profit margin, total asset turnover, return on total assets, return on equity are higher than Barco, a lower price earnings ratio for Kyan Company indicates that the shares of the company are not overpriced, i.e, there is value left for the investor.