Problem 1 Comparative ratio analysis - Olivia Company and Adam Company are the two largest competitors in their industry. Listed below is some summary information from the financial statements of two companies.

	Olivia Company			Adam Company					Olivia Company			Adam Company
Data from the current year-end balance sheets								Data from the current years income statement
Assets								Sales	$	770,000		$	904,200
Cash	$	22,000		$	37,000			Cost of goods sold		595,100			650,500
Accounts receivable, net		39,400			58,400			Interest expense		8,500			13,000
Merchandise inventory		84,640			142,500			Income tax expense		14,800			24,962
Prepaid expenses		6,100			7,000			Net income		151,600			215,738
Plant assets, net		310,000			304,400			Basic earnings per share		4.46			4.99
Total assets	$	462,140		$	549,300			Cash dividends per share		3.74			4.02
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	66,340		$	93,300			Accounts receivable, net	$	29,800		$	58,200
Long-term notes payable		86,800			107,000			Merchandise inventory		61,600			117,400
Common stock, $5 par value		170,000			216,000			Total assets		398,000			412,500
Retained earnings		139,000			133,000			Common stock, $5 par value		170,000			216,000
Total liabilities and equity	$	462,140		$	549,300			Retained earnings		114,560			90,926

1a. For both companies compute the following:

(a) current ratio

(b) acid-test ratio

(c) accounts receivable turnover

(d) inventory turnover

(e) days sales in inventory

(f) days sales uncollected.

1b. Which company do you think is the better short-term credit risk? Why?

2a. For both companies compute the following:

(a) profit margin ratio

(b) total asset turnover

(c) return on total assets

(d) return on common stockholders equity.

Assuming that each companys stock can be purchased at $70 per share, compute their

(e) price-earnings ratios

(f) dividend yields.

2b. Identify which companys stock you would recommend as the better investment. Why would you prefer that companys stock?