Two companies that operate in the same industry as competitors are being evaluated by a bank that may lend money to each one. Summary information from the financial statements of the two companies is provided on the next page:

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1. Calculate current ratios, acid-test ratios, accounts (and notes) receivable turnovers, merchandise 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 profit margins, total asset turnovers, returns on total assets employed, and returns on common stockholders' equity. Assuming that each company paid cash dividends of \(\$ 3\) per share and each company's stock can be purchased at \(\$ 45\) per share, calculate price-earnings ratio and dividend yield. Also state which company's stock you would recommend as the better investment and why.
Problem 16-5A Analysis of working capital (L.O. 3)

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Cash Accounts receivable. Notes receivable Merchandise inventory. Data from the Current Year-End Balance Sheets Zesta Company $ 30,200 105,500 Festa Company $ 57,100 118,500 16,500 133,300 18,000 98,700 Prepaid expenses.. 15,700 17,900 Plant and equipment, net. 332,900 340,100 Total assets.. $601,000 $683,400 Current liabilities $113,400 $141,800 Long-term notes payable.. 120,000 135,000 Common stock, $20 par value 182,000 212,000 Retained earnings. 185,600 194,600 Total liabilities and capital $601,000 $683,400 Data from the Current Year's Income Statements Sales $703,500 $992,100 Cost of goods sold 518,000 708,200 Interest expense 14,100 17,800 Income tax expense. 22,500 42,700 Net income. 54,200 74,700 Beginning-of-Year Data Accounts receivable, net. $ 98.000 $100,500 Notes receivable -0- -0- Merchandise inventory. 118,200 93,900 Total assets.. 514,300 600,000 Common stock, $20 par value 182,000 212,000 Retained earnings. 158,700 151,700