Ginger Adair is considering an investment in the common stock of a chain of retail department stores. She has narrowed her choice to two retail companies, Lewis Corporation and Ramsey Corporation, whose income statements and balance sheets are presented on the next page.

During the year, Lewis Corporation paid a total of $100,000 in dividends. The market price per share of its stock is currently $60. In comparison, Ramsey Corporation paid a total of $228,000 in dividends, and the current market price of its stock is $76 per share. Lewis Corporation had net cash flows from operations of $543,000 and net capital expenditures of

$1,250,000. Ramsey Corporation had net cash flows from operations of

$985,000 and net capital expenditures of $2,100,000. 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, using the available information. Compare the results. Round percentages and ratios to one decimal place, and consider changes of .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. User Insight: Compare the two companies by inserting the ratio calculations from 1 through 5 in a table with the following column headings: Ratio, Name, Lewis, Ramsey, and Company with More Favorable Ratio. Indicate in the last column which company had the more favorable ratio in each case.
7. User Insight: How could the analysis be improved if information about these companies’ prior years were available?
Alternate Problems Effects of Transactions on Ratios

Transcribed Image Text:

Net sales Income Statements Lewis Ramsey $25,120,000 $50,420,000 Costs and expenses Cost of goods sold Selling expenses Administrative expenses $12,284,000 $29,668,000 9,645,200 14,216,400 1,972,000 Total costs and expenses $23,901,200 4,868,000 $48,752,400 Income from operations $ 1,218,800 Interest expense 388,000 $ 1,667,600 456,000 Income before income taxes $ 830,800 $ 1,211,600 Income taxes expense 400,000 600,000 Net income $ 430,800 $ 611,600 Earnings per share $ 4.31 $ 10.19