Kevin Wolfer is considering an investment in the common stock of a chain of retail department stores. He has narrowed his choice to two retail companies, Roma Corporation and Lima Corporation, whose income statements and balance sheets follow.

During the year, Roma Corporation paid a total of $50,000 in dividends. The market price per share of its stock is currently $60. In comparison, Lima Corporation paid a total of $114,000 in dividends, and the current market price of its stock is $76 per share. Roma Corporation had net cash flows from operations of $271,500 and net capital expenditures of $625,000. Lima Corporation had net cash flows from operations of $492,500 and net capital expenditures of $1,050,000. Information for prior years is not readily available. Assume that all notes payable are current liabilities and all bonds payable are long-term liabilities and that there is no change in inventory.

REQUIRED

Conduct a comprehensive ratio analysis for each company, following the steps outlined below. Compare the results. (Round percentages and ratios to one decimal place and consider changes of 0.1 or less to be indeterminate.)

1. Prepare a profitability and total asset management analysis by calculating for each company the

(a) Profit margin,

(b) Asset turnover

(c) Return on assets.

2. Prepare a liquidity analysis by calculating for each company the

(a) Cash flow yield,

(b) Cash flows to sales,

(c) Cash flows to assets,

(d) Free cash flow.

3. Prepare a financial risk analysis by calculating for each company the

(a) Debt to equity ratio,

(b) Return on equity,

(c) Interest coverage ratio.

 4. Prepare an operating asset management analysis by calculating for each company

(a) Inventory turnover,

(b) Days’ inventory on hand,

(c) Receivable turnover,

(d) Days’ sales uncollected,

(e) Payables turnover,

(f) Days’ payable,

(g) Current ratio,

(h) Quick ratio.

 5. Prepare a market strength analysis by calculating for each company the

(a) Price/earnings (P/E) ratio

(b) Dividends yield.

6. How could the analysis be improved if information about these companies’ prior years were available?

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Income Statements Roma Lima Net sales $12,560,000 $25,210,000 Costs and expenses Cost of goods sold $ 6,142,000 Selling expenses Administrative expenses Total costs and expenses Income from operations Interest expense $14,834,000 7,108,200 2434,000 $24,376,200 $833,800 228,000 4,822,600 986,000 $11,950,600 609,400 194,000 Income before income taxes 415,400 605,800 Income taxes expense 200,000 300,000 305,800 Net income $ 215,400 Earnings per share 4.31 10.19 Balance Sheets Roma Lima Assets $ 192,400 84,600 985,400 Cash Marketable securities (at cost) Accounts recelvable (net) Inventory Prepaid expenses Property, plant, and equipment (net) Intangibles and other assets 80,000 203,400 552,800 629,800 54,400 2,913,600 553,200 $4,987,200 1,253,400 114,000 6,552,000 144,800 $9,326,600 Total assets Llabilities and Stockholders' Equity $ 344,000 150,000 50,200 2,000,000 1,000,000 609,800 833,200 $4,987,200 $ 572,600 Accounts payable Notes payable Income taxes payable Bonds payable Common stock, $20 par value 400,000 73,400 2,000,000 Additional paid-in capital Retained earnings Total liabilities and stockholders' equity 600,000 3,568,600 2,112,000 $9,326,600