EXERCISE 3–1 Westfield Capital Management Co.’s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry’s Departmental Stores ( JDS) or Miller Stores

(MLS). Selected financial data for both companies follow:

SELECTED FINANCIAL DATA AS OF MARCH 31, 2006

($ millions) JDS MLS Sales...................................................$21,250 $18,500 Fixed assets ........................................ 5,700 5,500 Short-term debt .................................. 1,000 Long-term debt ................................... 2,700 2,500 Equity.................................................. 6,000 7,500 Outstanding shares (in millions) ........ 250 400 Stock price ($ per share)..................... 51.50 49.50 Required:

a. Compute each of the following ratios for both JDS and MLS:

(1) Price-to-book ratio

(2) Total-debt-to-equity ratio

(3) Fixed-asset-utilization (turnover)

b. Select the company that better meets Westfield’s criteria.

c. The following information is from these companies’ notes as of March 31, 2006:
(1) JDS conducts a majority of its operations from leased premises. Future minimum lease payments (MLP) on noncancellable operating leases follow ($ millions):
MLP 2007.............................$ 259 2008............................. 213 2009............................. 183 2010............................. 160 2011............................. 155 2012 and later ............. 706 Total MLP ..........................$1,676 Less interest ................ (676)
Present value of MLP ........$1,000 Interest rate...................... 10%
(2) MLS owns all of its property and stores.
(3) During the fiscal year ended March 31, 2006, JDS sold $800 million of its accounts receivable with recourse, all of which was outstanding at year-end.
(4) Substantially all of JDS’s employees are enrolled in company-sponsored defined contribution plans. MLS sponsors a defined benefits plan for its employees. The MLS pension plan assets’ fair value is $3,400 million.
No pension cost is accrued on its balance sheet as of March 31, 2006 (note that MLS accounts for its pension plans under SFAS 87). The details of MLS’s pension obligations follow:
($ millions) ABO PBO Vested ................$1,550 $1,590 Nonvested .......... 40 210 Total ...................$1,590 $1,800 Compute all three ratios in part

(a) after making necessary adjustments using the note information.
Again, select the company that better meets Westfield’s criteria. Comment on your decision in part

(b) relative to the analysis here.