Compute each companys economic-value-added measure

Assignment Help Financial Accounting

Reference no: EM13943913

Requirements

Assume that you are considering purchasing stock as an investment. You have narrowed the choice to Topline.com and E-shop Stores and have assembled the following data.

Selected income statement data for current year:

Topline.com E-Shop Stores
Net sales (all on credit)	$598,000	$518,000
Cost of goods sold	452,000	382,000
Income from operations	95,000	69,000
Interest expense	-	11,000
Net income	63,000	37,000

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

	Topline.com	E-Shop Stores
Current assets:
Cash	$ 28,000	$ 36,000
Short-term investments	9,000	11,000
Current receivables, net	187,000	166,000
Inventories	219,000	186,000
Prepaid expenses	15,000	13,000
Total current assets	458,000	412,000
Total assets	984,000	935,000
Total current liabilities	371,000	340,000
Total liabilities	663,000	700,000
Preferred stock: 8%, $150 par		30,000
Common stock, $1 par (100,000 shares)	100,000
$5 par (10,000 shares)		50,000
Total stockholders' equity	321,000	235,000
Market price per share of common stock	$ 6.93	$ 58.82

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

	Topline.com	E-Shop Stores
Balance sheet:
Current receivables, net	$143,000	$194,000
Inventories	212,000	199,000
Total assets	853,000	913,000
Long-term debt	-	310,000
Preferred stock, 8%, $150 par		30,000
Common stock, $1 par (100,000 shares)	100,000
$5 par (10,000 shares)		50,000
Total stockholders' equity	259,000	219,000

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.

1. Compute the following ratios for both companies for the current year and decide which company's stock better fits your investment strategy.

a. Quick (acid-test) ratio

b. Inventory turnover

c. Days' sales in average receivables

d. Debt ratio

e. Times-interest-earned ratio

f. Return on common stockholders' equity

g. Earnings per share of common stock

h. Price/earnings ratio

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 6%.

Reference no: EM13943913

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