Chapter 14, Problem 14.43BP

Make an investment decision (Learning Objective 4)

Assume that you are purchasing an investment and have decided to invest in a company in the smartphone business. You have narrowed the choice to Digital Plus Electronics or Speed Network Electronics and have assembled the following data.

Selected income statement data for the current year follow:

	Digital Plus	Speed Network
Net sales (all on credit)	$401,500	$554,800
Cost of goods sold	$209,000	$231,000
Interest expense	–	$ 16,500
Net income	$ 49,000	$ 63,000

Selected balance sheet data at the beginning of the current year follow:

	Digital Plus	Speed Network
Current receivables, net	$ 34,300	$ 53,480
Inventories	$ 86,000	$ 77,000
Total assets	$258,000	$276,000
Common stock:
$1 par (10,000 shares)	$ 10,000
$1 par (14,000 shares)		$ 14,000

Selected balance sheet and market-price data at the end of the current year follow:

	Digital Plus	Speed Network
Current assets:
Cash	$ 30,500	$ 22,000
Short-term investments	52,220	21,200
Current receivables, net	35,000	40,000
Inventories	66,000	98,000
Prepaid expenses	2,280	6,800
Total current assets	$186,000	$188,000
Total assets	$436,000	$434,375
Total current liabilities	$109,000	$104,000
Total liabilities	$109,000	$139,000
Common stock:
$1 par (10,000 shares)	$ 10,000
$1 par (14,000 shares)		$ 14,000
Total stockholders’ equity	$327,000	$295,375
Market price per share of common stock	$ 73,50	$81,90

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.

Requirement

Compute the following ratios for both companies for the current year and decide which company’s stock better fits your investment strategy, Assume all sales are on credit.

1. a. Acid-test ratio
2. b. Inventory turnover
3. c. Days’ sales in average receivables
4. d. Debt ratio
5. e. Gross profit percentage
6. f. Earnings per share of common stock
7. g. Price/earnings ratio