Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to

Digitalized

Corp. and

Every Zone,

Inc. and have assembled the following data.

Selected income statement data for the current year:

	Digitalized	Every Zone
Net Sales Revenue (all on credit)	$417,925	$497,130
Cost of Goods Sold	208,000	255,000
Interest Expense	0	17,000
Net Income	54,000	70,000

(Click to view the income statement data.)

Selected balance sheet and market price data at the end of the current year:

	Digitalized	Every Zone
Current Assets:
Cash	$27,000	$17,000
Short-term Investments	38,000	20,000
Accounts Receivables, Net	36,000	49,000
Merchandise Inventory	66,000	102,000
Prepaid Expenses	18,000	14,000
Total Current Assets	$185,000	$202,000
Total Assets	$263,000	$325,000
Total Current Liabilities	101,000	99,000
Total Liabilities	101,000	131,000
Common Stock:
$1 par (10,000 shares)	10,000
$2 par (14,000 shares)		28,000
Total Stockholders' Equity	162,000	194,000
Market Price per Share of Common Stock	97.20	110.00
Dividends Paid per Common Share	1.20	1.00

Selected balance sheet data at the beginning of the current year:

	Digitalized	Every Zone
Balance sheet:
Accounts Receivables, net	$38,000	$54,000
Merchandise Inventory	86,000	88,000
Total Assets	260,000	278,000
Common Stock:
$1 par (10,000 shares)	10,000
$2 par (14,000 shares)		28,000

(Click to view the balance sheet and market price data.)

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Read the requirements.

1.

Compute the following ratios for both companies for the current year:

a.

Acid-test ratio

b.

Inventory turnover

c.

Days' sales in receivables

d.

Debt ratio

e.

Earnings per share of common stock

f.

Price/earnings ratio

g.

Dividend payout

2.

Decide which company's stock better fits your investment strategy.

Requirement 1a. Compute the acid-test ratio for both companies for the current year.

Begin by selecting the formula to compute the acid-test ratio.

Acid-test ratio

=