Assume the role of a banker and you have funds to lend to only one company. You
Question:
Assume the role of a banker and you have funds to lend to only one company. You have narrowed your choices to a company in the air conditioning & heating business – either Reitzel Heating or Klassen. You are given the following financial data for both companies on the following page.
For each company calculate the following
- Current Ratio
- Acid test ratio
- Inventory turnover
- Days’ sales in average receivable
- Debt ratio
- Times interest earned ratio
- Return on shareholders’ equity
- Earnings per share of common stock
- Price Earnings Ratio
- Debt to Equity Ratio
Required:
1. Prepare an executive summary explaining which company you would loan the funds to. Justify your answer using the ratios that you calculated.
2. Would you consider becoming an equity holder for either company? Why or why not?
Selected income statement date for current year: | ||
Reitizel | Klassen | |
Net Sales (all on credit) | 388,000 | 502,000 |
Cost of Goods sold | 215,000 | 263,000 |
Income from Operations | 82,000 | 145,000 |
Interest expense | 19,000 | |
Net Income | 54,000 | 78,000 |
Selected balance sheet data at the beginning of the current year: | ||
Reitizel | Klassen | |
Current Receivables, net | 44,000 | 56,000 |
Inventories | 97,000 | 96,000 |
Total assets | 259,000 | 270,000 |
Preferred shares, $10.00 (2000 shares) | 20,000 | |
Common Shares (10,000 shares) | 10,000 | |
(6000 shares) | 12,500 | |
Total Shareholder's Equity | 126,000 | 133,000 |
Selected balance sheet data at the end of the current year: | ||
Reitizel | Klassen | |
Current Assets: | ||
Cash | 25,000 | 21,000 |
Temporary Investments | 22,000 | 16,000 |
Current receivables, net | 42,000 | 46,000 |
Inventories | 84,000 | 97,000 |
Prepaid Expenses | 2,000 | 3,000 |
Total Current Assets | 175,000 | 183,000 |
Total Assets | 273,000 | 326,000 |
Total Current Liabilities | 107,000 | 94,000 |
Total Liabilities | 107,000 | 144,000 |
Preferred shares, $10.00 (2000 shares) | 20,000 | |
Common Shares (10,000 shares) | 10,000 | |
(6000 shares) | 12,500 | |
Total Shareholder's Equity | 166,000 | 182,000 |
Market price per share of common stock | 48 | 110 |
Auditing and Assurance Services Understanding the Integrated Audit
ISBN: 978-0471726340
1st edition
Authors: Karen L. Hooks