Assume that you are considering purchasing stock as an investment. You have narrowed the choice…
Assume that you are considering purchasing stock as an investment. You have narrowed the choice to Video.com and On-Line Express and have assembled the following data:
Selected income statement data for current year:
Selected balance sheet and market price data at end of current year:
Selected balance sheet data at beginning of current year:
Your strategy is 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 factors and that your decision depends on the results of ratio analysis.
❙ Required
1. Compute the following ratios for both companies for the current year and decide which company’s stock better fits your investment strategy.
a. Acid-test ratio pp. 701–702)
b. Inventory turnover pp. 701–702)
c. Days’ sales in average receivables pp. 702–703)
d. Debt ratio p. 703)
e. Times-interest-earned ratio p. 703)
f. Return on common stockholders’ equity pp. 705–706)
g. Earnings per share of common stock pp. 705–706)
h. Price/earnings ratio pp. 706–707)
2. Compute each company’s economic-value-added EVA ®) measure and determine whether the companies’ EVA ®s confirm or alter your investment decision. Each company’s cost of capital is 10%. pp. 707–708)
