Question
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
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
BetterDigital Corp. and VeryNetwork, Inc. and have assembled the following data.
Selected income statement data for the current year:
Best Digital | Very Network | |
Net Sales Revenue (all on credit) | $421,940 | $498,955 |
Cost of Goods Sold | 210,000 | 257,000 |
Interest Expense | 0 | 14,000 |
Net Income | 50,000 | 68,000 |
Selected balance sheet and market price data at the end of the current year:
Better Digital | Very Network | |
Current Assets: | ||
Cash | $27,000 | $22,000 |
Short-term Investments | 43,000 | 14,000 |
Accounts Receivables, Net | 36,000 | 43,000 |
Merchandise Inventory | 64,000 | 100,000 |
Prepaid Expenses | 21,000 | 16,000 |
Total Current Assets | $191,000 | $195,000 |
Total Assets | $260,000 | $324,000 |
Total Current Liabilities | 103,000 | 97,000 |
Total Liabilities | 103,000 | 131,000 |
Common Stock: | ||
$1 par (10,000 shares) | 10,000 | |
$1 par (15,000 shares) | 15,000 | |
Total Stockholders' Equity | 157,000 | 193,000 |
Market Price per Share of Common Stock | 70.00 | 122.31 |
Dividends Paid per Common Share | 1.20 | 1.10 |
Selected balance sheet data at the beginning of the current year:
Better Digital | Very Network | |
Balance sheet: | ||
Accounts Receivables, net | $43,000 | $54,000 |
Merchandise Inventory | 86,000 | 90,000 |
Total Assets | 258,000 | 274,000 |
Common Stock: | ||
$1 par (10,000 shares) | 10,000 | |
$1 par (15,000 shares) | 15,000 |
Requirement 1a. Compute the acid-test ratio for both companies for the current year.
Acid-test ratio | = | (Cash + Short-term investments + Accounts receivable, net) Total current liabilities |
Now, compute the acid-test ratio for both companies. (Round your answers to two decimal places, X.XX.)
Better Digital | Very Network | |
Acid-test ratio |
Requirement 1b. Compute the inventory turnover for both companies for the current year.
Inventory turnover | = | Cost of goods sold Average merchandise inventory |
Now, compute the inventory turnover for both companies. (Round your answers to two decimal places, X.XX.)
Better Digital | Very Network | |
Inventory turnover |
Requirement 1c. Compute the days' sales in receivables for both companies for the current year.
Days' sales in receivables | = | 365 Accounts receivable turnover ratio |
Now, compute the days' sales in receivables for both companies. (Round interim calculations to two decimal places and your final answers to the nearest whole day.)
Better Digital | Very Network | |
Days' sales in receivables |
Requirement 1d. Compute the debt ratio for both companies for the current year
Debt ratio | = | Total liabilities Total asset |
Now, compute the debt ratio for both companies. (Round your answers to the one tenth of a percent, X.X%.)
Better Digital | Very Network | |||
Debt ratio | % | % |
Requirement 1e. Compute the earnings per share of common stock for both companies for the current year.
Earnings per share | ||
of common stock | = | (Net income - Preferred dividends) Weighted average number of common share outstanding |
Now, compute the earnings per share of common stock for both companies. (Round your answers to the nearestcent.)
Better Digital | Very Network | |
Earnings per share of common stock | $ | $ |
Requirement 1f. Compute the price/earnings ratio for both companies for the current year.
Price/earnings ratio | = | Market price per share of common stock Earnings per share |
Now, compute the price/earnings ratio for both companies. (Round interim and final answers to two decimal places, X.XX.)
Better Digital | Very Network | |
Price/earnings ratio |
Requirement 1g. Compute the dividend payout for both companies for the current year.
Dividend payout | = | Annual dividend per share Earnings per share |
Now, compute the dividend payout for both companies. (Round interim answers to two decimal places, X.XX, and your final answers to the nearest whole percent, X%.)
Better Digital | Very Network | |||
Dividend payout | % | % |
Requirement 2. Decide which company's stock better fits your investments strategy.
________ common stock seems to fit the investment strategy better. Its price/earnings ratio is lower than ____________, and ____________ appears in better shape financially than ____________. On the majority of the ratios, __________ looks better than ____________.
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