PROBLEM 19-6Using ratios to decide between two share investments: measuring economic value added
Assume that you are considering purchasing shares in a company in the automotive supply industry. You have narrowed the choice to Bowie Ltd or Drane Ltd and have assembled the following data:
Selected statement of financial performance data for current year:
Bowie, Inc.Drane Corp.
Net sales (all on credit)...... $497,000$371,000
Cost of goods sold...... 258,000209,000
Interest expense...... 19 000-
Profit before income tax...... 119,00079,000
Net profit...... 72,00048,000
Selected statement of financial position and market price data at end of current year:
Bowie, Inc.Drane Corp.
Current assets:
Cash at bank...... $19,000$22,000
Short-term investments...... 18,00020,000
Current receivables, net...... 46,00042,000
Inventories...... 100,00087,000
Prepaid expenses...... 3,0002,000
Total current assets...... 186,000173,000
Total assets...... 328,000265,000
Total current liabilities...... 98,000108,000
Total liabilities...... 131,000*108,000*
Preference share capital: 5%...... 20,000–
Ordinary share capital (10,000 shares)...... 10,000
(6,000 shares)...... 12,000-
Total shareholders' equity...... 197,000157,000
Market price per share of ordinary share...... $81.50$45.00
*Bills payable:Bowie, Inc.,$86,000
Drane Corp.,$1,000
PROBLEM 19-6A
Continued
Selected statement of financial position data at beginning of current year:
Bowie, Inc.Drane Corp.
Current receivables, net...... $48,000$40,000
Inventories...... 88,00093,000
Total assets...... 270,000259,000
Preference share capital 5%, $100 par...... 20,000–
Ordinary share capital (10,000 shares)...... 10,000
(6,000 shares)...... 12,000
Total shareholders' equity...... 126,000118,000
Your investment strategy is to purchase the stocks of companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analysed all other factors, and your decision depends on the results of the ratio analysis to be performed.
Required:
1.Calculate the following ratios for both companies for the current year, and decide which company's shares better fits your investment strategy:
a.Current ratio
b.Acid-test ratio
- Inventory turnover
- Days’ sales in average receivables
- Debt ratio
f.Times-interest-earned ratio
- Return on net sales
- Return on total assets
- Return on ordinary shareholders' equity
j.Earnings per share
j.Book value per ordinary share
k.Price/earnings ratio
2.Calculate each company’s economic-value-added (EVA) measure, and determine whether their EVA’s confirm or alter your investment decision. Each company’s cost of capital is 13.5%. Round all amounts to the nearest $1,000.
PROBLEM 19-6A
Continued
Instructions:
1.Review the printed template called Problem 19-6 that follows these instructions. Most of the problem data have been entered for you in the data input section of the spreadsheet.
2.There are 29 FORMULAS in the template that you need to provide to complete your analysis. Using the spaces provided below, write the formulas where requested in the template.
FORMULA1______FORMULA16______
FORMULA2______FORMULA17______
FORMULA3______FORMULA18______
FORMULA4______FORMULA19______
FORMULA5______FORMULA20______
FORMULA6______FORMULA21______
FORMULA7______FORMULA22______
FORMULA8______FORMULA23______
FORMULA9______FORMULA24______
FORMULA10______FORMULA25______
FORMULA11______FORMULA26______
FORMULA12______FORMULA27______
FORMULA13______FORMULA28______
FORMULA14______FORMULA 29 ______
FORMULA15______
- Click the Excel icon from the program manager screen to start the spreadsheet program. Click on Open Fileto retrieve the template for the problem. Then enter the 29 FORMULAS where indicated on the template.
Type the answer where indicated.
4.Click the Save FileButton to save your work.
5.Click the Print Button to print your work.