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

Digital Plus Electronics

or

Every Zone Electronics

and have assembled the following data. Selected income statement data for the current year follows:

4(Click

to view the income statement data.)

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

5(Click

to view the balance sheet data.)

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

6(Click

to view the 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

requirement7.

(Enter any percentages as decimals in this format, X.XX. Round your answers to two decimal places.)

	Digital Plus	Every Zone
a. Acid-test ratio	1.05	0.85

	Digital Plus	Every Zone
b. Inventory turnover	2.75	2.72

	Digital Plus	Every Zone
c. Days' sales in average receivables	31	30.25

	Digital Plus	Every Zone
d. Debt ratio	0.4	0.5

	Digital Plus	Every Zone
e. Gross profit percentage

	Digital Plus	Every Zone
f. Earnings per share of common stock

	Digital Plus	Every Zone
g. Price/earnings ratio

(1)

common stock seems to fit the investment strategy better. Its price/earnings ratio is

(2)

and

(3)

. On a majority of the ratios,

(4)

.

4: Income statement

	Digital Plus	Every Zone
Net sales (all on credit). . . . . . . . . . . . . . .	$452,600	$511,000
Cost of goods sold. . . . . . . . . . . . . . . . . .	$209,000	$255,000
Interest expense. . . . . . . . . . . . . . . . . . . . .	-	$18,500
Net income. . . . . . . . . . . . . . . . . . . . . . . . .	$56,100	$64,400

5: Balance sheet and market price data

	Digital Plus	Every Zone
Current receivables, net. . . . . . . . . . . . . . . . . .	$40,880	$40,700
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$82,000	$82,500
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$259,000	$271,000
Common stock: $1 par, (11,000 shares). . . . .	$11,000
Common stock: $1 par, (14,000 shares). . . . .		$14,000

6: Balance sheet and market price data

	Digital Plus	Every Zone
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . .	$29,000	$20,500
Short-term investments. . . . . . . . . . .	$46,300	$22,200
Current receivables, net. . . . . . . . . . .	$36,000	$44,000
Inventories. . . . . . . . . . . . . . . . . . . . . .	$70,000	$105,000
Prepaid expenses. . . . . . . . . . . . . . . . .	$2,700	$4,300
Total current assets. . . . . . . . . . . . . . .	$184,000	$196,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . .	$265,000	$272,000
Total current liabilities. . . . . . . . . . . . . . . . . .	$106,000	$102,000
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . .	$106,000	$136,000
Common stock: $1 par, (11,000 shares). . . .	$11,000
Common stock: $1 par, (14,000 shares). . . .		$14,000
Total stockholders' equity. . . . . . . . . . . . . . .	$159,000	$136,000
Market price per share of common stock. .	$86.70	$85.10

7: Requirement

Compute the following ratios for both companies for the current year and decide which company's stock better fits your investment strategy. Assume all sales are on credit.
a.	Acid-test ratio
b.	Inventory turnover
c.	Days' sales in average receivables
d.	Debt ratio
e.	Gross profit percentage
f.	Earnings per share of common stock
g.	Price/earnings ratio

(1)

Digital Plus Electronics'

Every Zone Electronics'

(2)

higher than that of Digital Plus Electronics,

higher than that of Every Zone Electronics,

lower than that of Digital Plus Electronics,

lower than that of Every Zone Electronics,

(3)

Digital Plus Electronics appears to be in better shape than Every Zone Electronics

Every Zone Electronics appears to be in better shape than Digital Plus Electronics

(4)

Digital Plus Electronics looks better than Every Zone Electronics

Every Zone Electronics looks better than Digital Plus Electronics