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    Assignment - Model Answer

    Uploaded by

    Mahmoud Ibrahim
    Sled Company and Zip Company have similar current and acid-test ratios, indicating near equal short-term financial strength. However, Sled Company turns its inventory faster and collects accounts receivable more rapidly. This makes Sled Company the better short-term credit risk. Both companies have around a 6.5% return on assets, but Sled's 10.5% return on equity is slightly higher than Zip's 10%. Assuming the stocks can be purchased at book value, Sled Company's stock appears to be the better investment due to its higher return on equity and better operational performance.

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    Assignment - Model Answer

    Uploaded by

    Mahmoud Ibrahim
    36 views2 pages
    Sled Company and Zip Company have similar current and acid-test ratios, indicating near equal short-term financial strength. However, Sled Company turns its inventory faster and collects accounts receivable more rapidly. This makes Sled Company the better short-term credit risk. Both companies have around a 6.5% return on assets, but Sled's 10.5% return on equity is slightly higher than Zip's 10%. Assuming the stocks can be purchased at book value, Sled Company's stock appears to be the better investment due to its higher return on equity and better operational performance.

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    Assignment – Model Answer

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    Sled Company and Zip Company have similar current and acid-test ratios, indicating near equal short-term financial strength. However, Sled Company turns its inventory faster and collects accounts receivable more rapidly. This makes Sled Company the better short-term credit risk. Both companies have around a 6.5% return on assets, but Sled's 10.5% return on equity is slightly higher than Zip's 10%. Assuming the stocks can be purchased at book value, Sled Company's stock appears to be the better investment due to its higher return on equity and better operational performance.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    36 views2 pages

    Assignment - Model Answer

    Uploaded by

    Mahmoud Ibrahim
    Sled Company and Zip Company have similar current and acid-test ratios, indicating near equal short-term financial strength. However, Sled Company turns its inventory faster and collects accounts receivable more rapidly. This makes Sled Company the better short-term credit risk. Both companies have around a 6.5% return on assets, but Sled's 10.5% return on equity is slightly higher than Zip's 10%. Assuming the stocks can be purchased at book value, Sled Company's stock appears to be the better investment due to its higher return on equity and better operational performance.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Assignment – Model Answer

    Problem

    Following are data from the statements of two companies selling similar products:
    Current Year-End Balance Sheets
    Sled Zip
    Company Company
    Cash ................................................................................ $ 11,900 $ 20,000
    Notes receivable—short-term ...................................... 7,700 3,200
    Accounts receivable, net ............................................... 42,000 64,000
    Inventory ........................................................................ 58,800 87,680
    Prepaid expenses ........................................................... 1,680 3,520
    Plant and equipment, net ............................................. 232,120 274,400
    Total assets ..................................................................... $354,200 $452,800

    Current liabilities .......................................................... $ 56,000 $ 80,000


    Mortgage payable.......................................................... 70,000 80,000
    Common stock, $10 par value ...................................... 140,000 160,000
    Retained earnings.......................................................... 88,200 132,800
    Total liabilities and stockholders’ equity .................... $354,200 $452,800

    Data from the Current Year’s Income Statement


    Sales ................................................................................ $672,000 $880,000
    Cost of goods sold .......................................................... 528,080 699,840
    Interest expense ............................................................. 4,200 5,600
    Net income ..................................................................... 23,373 28,896
    Beginning-of-Year Data
    Inventory ........................................................................ $ 53,200 $ 85,120
    Total assets ..................................................................... 345,800 443,200
    Stockholders’ equity ..................................................... 217,000 285,120

    Required:

    1. Calculate current ratios, acid-test ratios, inventory turnovers, and days’ sales
    uncollected for the two companies. Then state which company you think is the
    better short-term credit risk and why.
    2. Calculate return on total assets employed and return on stockholders’ equity.
    Then, under the assumption that each company’s stock can be purchased at book
    value, state which company’s stock you think is the better investment and why.
    Answer:

    Part 1

    Sled Company Zip Company

    Current ratio: $122,080 = 2.18 to 1 $178,400 = 2.23 to 1


    $ 56,000 $ 80,000

    Acid-test ratio: $ 61,600 = 1.10 to 1 $ 87,200 = 1.09 to 1


    $ 56,000 $ 80,000

    Inventory $528,080 = 9.4 times $669,840 = 7.8 times


    turnover: $ 56,000 $ 86,400

    Days’ sales $ 42,000 x 365 = 22.8 $ 64,000 x 365 = 26.5


    uncollected: $672,000 $880,000

    Sled Company and Zip Company have almost equal current and acid-test ratios, so
    near the same that the differences are not significant. However, Sled Company turns
    its inventory and collects its accounts receivable more rapidly than Zip Company;
    and on this basis it appears to be a better short-term credit risk.

    Part 2
    $ 23,373 $ 28,896
    Return on total assets: = 6.68% = 6.45%
    $350,000 $448,000

    Return on stockholders’ $ 23,373 $ 28,896


    = 10.5% = 10.0%
    equity: $222,600 $288,960

    Assuming that the stock of each company could be purchased at book value, Sled
    Company’s stock seems to be the better investment. This conclusion is based on Sled’s
    slightly better return on stockholders’ equity (or return on the investment) of 10.5%
    compared with 10% for Zip. In addition, the better inventory turnover, days’ sales
    uncollected, and return on total assets employed indicate that Sled Company might
    be the better managed company. This information reinforces the conclusion as to
    which stock is the better investment.

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