1a For both companies compute the a profit margin ratio b to

0 Required Information The following information applies to the questions displayed below Summary information from the financial statements of two companles competing in the same Industry follows BarcoKyan Cospany Cospany Company Company Data fron the current year-end balance sheets Assets Cash Accounts receivable, net Current notes receivable (trade) Merchandise inventory Prepaid expenses Plant assets, net Total assets Data from the current year\'s income statement Sales s ze,eee $ 31,e00 Cost of goods sold 36,480 53,46e Interest expense 587,100 64se 8,58 14,000 15,377 25 121 189,823 233,489 5.91 40 3.743.92 9,280 7,4e8 Incone tax expense 84,240 13e, 5ee Net income 5, 800 ,600 Basic earnings per share 316,800 307,40 Cash dividends per share 465,64e $537,300 Beginning-of-year balance sheet data Accounts receivable, net Liabilities and Equity Current Labi1ities Long-tere notes payable Common stock, $5 par value Retained earning s 29,8ee s s4zee ces 63,348 $183,380 Current notes receivable (trade) 79,80 109,800 Merchandise inventory 68,09216,00 Total assets 8,999 422,5e 162,580 309 90e Common stock, $S par value 160, ee02361 Total 1iabiiities and equity 465,64 5537,00 Retained earnings 3,357 448s 2a. For both companies compute the ( profit margin ratio, () total asset turnover(d return on total assets, and (oh return on common stockholders\' equity Assuming that share and each company\'s stock can be purchased at $100 per share, compute their (e) price earnings retos and?anidend yields (Do not round intermediete calculations. Round your answers to 2 decimal places.) 2b. Identify which company\'s stock you would recommend os the better investment Prev 5 of ip

Solution

1a.

a) Profit Margin Ratio = (Net Income * 100 )/ Sales

For Barce, Profit Margin Ratio = ($189023 * 100) / $800000 = 23.63%

For Kyan, Profit Margin Ratio = ($233489 * 100) / $913200 = 25.57%

b)Total Asset Turnover = Net Sales / Average Total Assets

where average total assets = (beginning + ending total assets) / 2

For Barco, Total Asset Turnover = $800000 / $436820 = 1.83

For Kyan, Total Asset Turnover = $913200 / $479900 = 1.90

c) Return on Total Assets = Net Income / Average Total Assets

For Barco, Return on Total Assets = ($189023 * 100) / $436820 = 43.27%

For Kyan, Return on Total Assets = ($233489 * 100) / $479900 = 48.65%

d) Return on Common Stockholders Equity = Net Income / Common Stockholders Equity

For Barco, Return on Equity = ($189023 * 100 ) / $160000 = 118.14%

For Kyan, Return on Equity = ($233489 * 100 ) / $216000 = 108.10%

e) Price Earning Ratio = Market Price Per Share / Earning Per Share

For Barco, PE ratio = $100 / $5.91 = 16.92 times

For Kyan, PE ratio = $100 / $5.40 = 18.52 times

f) Dividend Yield = (Dividend Per Share *100) / Market Price Per Share

For Barco, Dividend Yield = ($3.74*100) / $100 = 3.74%

For Kyan, Dividend Yield = ($3.92*100) / $100 = 3.92%

1b. Looking at the Return on Common Stockholders Equity & the PE ratio which are the key factors in determining the investment, investing in Barco Company is recommended.