Reference no: EM131052663

Using Ratios to Compare Alternative Investment Opportunities

The financial statements for Armstrong and Blair companies are summarized here:

			Blair Company
		Armstrong Company
Balance Sheet
Cash	$	35.000	$22.000
Accounts Receivable. Net		40.000	30.000
Inventory		100.000	40.000
Equipment Net		180,000	300,000
Other Assets		45.000	408.000
Total Assets	$	400000	$800,000
Current Liabilities	$	100.000	$50,000
NOte Payable (long-term)		60000	37000
Total Liabilities		160.000	420.000
Common Stock (par $10)		150.000	200.000
Additional Paid-in Capital		30.000	110.000
RotalnettEtnik101		60000	70.000
Total Liabilities and		$400.000	$800.000
Stockholders' Equity
Income Statement
Sales Revenue	$	450.000	$810.000
Cost of Goods Sold		245.000	405.000
Other Expenses		160.000	315.000
Net Income	$	45.000	$90.000
Other Data
Estimated value of each share at end of year	$	18	$27
Selected Data from
Previous Year
Accounts Receivable. Net	$	20.000	$38.000
Inventory		92,000	45.000
Equipment, Net		180,000	300,000
Note Payable (long-term)		60.000	70.000
Total Stockholders' Equity		231.000	440.000

The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years and each has had steady growth. Despite these similarities, the management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, "We avoid what we consider to be undue risk." Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. No shares were issued in the current year and neither company is publicly held. Blair Company has an annual audit by a CPA, but Armstrong Company does not. Assume the end-of-year total assets and net equipment balances approximate the year's average and all sales are on account.

Required:

1. Calculate the ratios in Exhibit 13.5 for which sufficient information is available. Round all calculations to two decimal places.

TIP: To calculate EPS, use the balance in Common Stock to determine the number of shares outstanding. Common Stock equals the par value per share times the number of shares.

2. A venture capitalist is considering buying shares in one of the two companies. Based on the data given, prepare a comparative written evaluation of the ratio analyses (and any other available information) and conclude with your recommended choice.

TIP: Comment on how accounting differences affect your evaluations, if at all.

Project Requirements

Financial Accounting Project Is in Chapter 13, Under Coached Problem CP13-6 on Page 21. The Companies are Armstrong and Blair. This is a hand in problem where you do the ratios in Connect and the written portion is send via atlas email along with the connect portion. You can send both the ratios and written portion via atlas email. This is an analysis type project where you explain each ratio and then tell what it means to each company. After the above you then pick a company that you would financially support and defend your answer by interpreting the ratio's that you used to come to your conclusion. The interest is in why you made the decision. Use exhibit 13-5 for the ratio's you are to calculate. Look on page 597.