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 Best Digital, Corp., and Every Zone, Inc., and have assembled the following data.

Selected income statement data for the current year: Best Digital Every Zone Net sales (all on credit) $420,115 $498,955 Cost of goods sold $210,000 $256,000 Interest expense $16,000 Net income $48,000 $74,000 Selected balance sheet and market price data at the end of the current year: Best Digital Every Zone Current assets: Cash $25,000 $23,000 Short-term investments $42,000 $21,000 Current receivables, net $42,000 $52,000 Inventories $69,000 $105,000 Prepaid expenses $19,000 $14,000 Total current assets $197,000 $215,000 Total assets $268,000 $331,000 Total current liabilities . $102,000 $100,000 Total liabilities . $102,000 $128,000 Common stock, $1 par (15,000 shares) $15,000 $1 par (16,000 shares) $16,000 Total stockholders equity $166,000 $203,000 Market price per share of common stock $48.00 $115.75 Dividends paid per common share $2.00 $1.80 Selected balance sheet data at the beginning of the current year: Best Digital Every Zone Balance sheet: Current receivables, net $47,000 $56,000 Inventories $83,000 $92,000 Total assets $261,000 $274,000 Common stock, $1 par (15,000 shares)

$15,000 $1 par (16,000 shares) $16,000 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. Requirement 1. Compute the following ratios for both companies for the current year, and decide which companys stock better fits your investment strategy. 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

1 Using ratios to decide between two stock investments 2 Assume that you are purchasing an investment and have decided to invest in a company in the digital phone 3 business. You have narrowed the choice to Best Digital, 4 5 Selected income statement data for the current year: 6 7 Best Digital $420,115 8 Net sales (all on credit) 9 Cost of goods sold $210,000 10 Interest expense 11 Net income $48,000 12 i 13 Selected balance sheet and market price data at the end of the current year: 14 15 Best Digital 16 Current assets: 17 Cash $25,000 18 Short-term investments $42,000 19 Current receivables, net $42,000 20 Inventories $69,000 21 Prepaid expenses $19,000 22 Total current assets. $197,000 23 Total assets $268,000 24 Total current liabilities. $102,000 25 Total liabilities. $102,000 26 Common stock, $1 par (15,000 shares) $15,000 27 $1 par (16,000 shares) 28 Total stockholders' equity $166,000 29 Market price per share of common stock $48.00 30 Dividends paid per common share $2.00 31 i 32 Selected balance sheet data at the beginning of the current year: 33 ! 34 Best Digital 35 Balance sheet: 36 Current receivables, net $47,000 $56,000 37 Inventories $83,000 $92,000 38 Total assets $261,000 $274,000 39 Common stock, $1 par (15,000 shares) $15,000 40 $1 par (16,000 shares) $16,000 41 I Your strategy is to invest in companies that have low price/earnings ratios but appear td 42 be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis. 43 i 44 Requirement 45 1. Compute the following ratios for both companies for the current year, and decide which company's stock better fits your investment strategy. 46 a. Acid-test ratio 47 b. Inventory turnover 48 c. Days' sales in receivables 49 d. Debt ratio 50 K e. Earnings per share of common stock Every Zone $498,955 $256,000 $16,000 $74,000 Every Zone: $23,000 $21,000 $52,000 $105,000 $14,000 $215,000 $331,000 $100,000 $128,000 $16,000 $203,000 $115.75 $1.80 Every Zone 1 Using ratios to decide between two stock investments 2 Assume that you are purchasing an investment and have decided to invest in a company in the digital phone 3 business. You have narrowed the choice to Best Digital, 4 5 Selected income statement data for the current year: 6 7 Best Digital $420,115 8 Net sales (all on credit) 9 Cost of goods sold $210,000 10 Interest expense 11 Net income $48,000 12 i 13 Selected balance sheet and market price data at the end of the current year: 14 15 Best Digital 16 Current assets: 17 Cash $25,000 18 Short-term investments $42,000 19 Current receivables, net $42,000 20 Inventories $69,000 21 Prepaid expenses $19,000 22 Total current assets. $197,000 23 Total assets $268,000 24 Total current liabilities. $102,000 25 Total liabilities. $102,000 26 Common stock, $1 par (15,000 shares) $15,000 27 $1 par (16,000 shares) 28 Total stockholders' equity $166,000 29 Market price per share of common stock $48.00 30 Dividends paid per common share $2.00 31 i 32 Selected balance sheet data at the beginning of the current year: 33 ! 34 Best Digital 35 Balance sheet: 36 Current receivables, net $47,000 $56,000 37 Inventories $83,000 $92,000 38 Total assets $261,000 $274,000 39 Common stock, $1 par (15,000 shares) $15,000 40 $1 par (16,000 shares) $16,000 41 I Your strategy is to invest in companies that have low price/earnings ratios but appear td 42 be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis. 43 i 44 Requirement 45 1. Compute the following ratios for both companies for the current year, and decide which company's stock better fits your investment strategy. 46 a. Acid-test ratio 47 b. Inventory turnover 48 c. Days' sales in receivables 49 d. Debt ratio 50 K e. Earnings per share of common stock Every Zone $498,955 $256,000 $16,000 $74,000 Every Zone: $23,000 $21,000 $52,000 $105,000 $14,000 $215,000 $331,000 $100,000 $128,000 $16,000 $203,000 $115.75 $1.80 Every Zone