Caitlin Cleary is considering an investment in the common stock of a chain of souvenir stores. She has narrowed her choice to two companies, Dover Corporation and Calais Corporation, whose income statements and balance sheets are presented here.

During the year, Dover Corporation paid a total of $50,000 in dividends. The market price per share of its stock is currently $60. In comparison, Calais Corporation paid a total of $114,000 in dividends, and the current market price of its stock is $76 per share. Dover Corporation had net cash flows from operations of $271,500 and net capital expenditures of $625,000. Calais 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. 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 liquidity analysis by calculating for each company the (a) current ratio, (b) quick ratio, (c) receivable turnover, (d) days’ sales uncollected, (e) inventory turnover, (f) days’ inventory on hand, (g) payables turnover, and (h) days’ payable.

2. Prepare a profitability analysis by calculating for each company the (a) profit margin, (b) asset turnover, (c) return on assets, and (d) return on equity.

3. Prepare a long-term solvency analysis by calculating for each company the (a) debt to equity ratio and (b) interest coverage ratio.

4. Prepare a cash flow adequacy analysis by calculating for each company the (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow.

5. Prepare an analysis of market strength by calculating for each company the (a) price/earnings (P/E) ratio and (b) dividends yield.

6. Compare the two companies by inserting the ratio calculations from 1 through 5 in a table with the following column headings: Ratio, Name, Dover, Calais, and Company with More Favorable Ratio. Indicate in the last column which company had the more favorable ratio in each case.

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

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Income Statements Dover Calais Net sales $13,000,000 $25,000,000 Costs and expenses Cost of goods sold Selling expenses Administrative expenses Total costs and expenses Income from operations $ 6,000,000 $14,000,000 4,000,000 7,000,000 1,000,000 $11,000,000 $ 2,000,000 3,000,000 $24,000,000 $ 1,000,000 150,000 $ 850,000 150,000 600,000 Interest expense 200,000 $ 1,800,000 800,000 $ 1,000,000 Income before income taxes Income taxes expense Net income Earnings per share 10.00 10.00 Balance Sheets Dover Calais Assets $ 80,000 200,000 $ 180,000 20,000 900,000 1,300,000 Cash Marketable securities (at cost) Accounts receivable (net) Inventory Prepaid expenses Property, plant, and equipment (net) Intangibles and other assets Total assets 600,000 700,000 20,000 2,000,000 120,000 6,000,000 400,000 $4,000,000 480,000 $9,000,000 Dover Calais Accounts payable Notes payable Income taxes payable Bonds payable Common stock, $10 par value Additional paid-in capital Retained earnings Liabilities and Stockholders' Equity $ 200,000 700,000 80,000 1,000,000 1,000,000 120,000 900,000 $ 600,000 400,000 70,000 2,000,000 600,000 2,330,000 3,000,000 Total liabilities and stockholders' equity $4,000,000 $9,000,000