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Answer is complete but not entirely correct. ERNST COMPANY YOUNG COMPANY Ratio Tests of profitability: Return on equity Return on assets Financial leverage 13.22% 114 % 166.35 % 115.6 % 77.85 x % 46.80 x% ercentage 4 5 6 $12.99 $1.80 Earninas per share Profit margin Fixed asset turnover 42.56 % 11.43 % 6.90 2.62 Tests of liquidity: Cash ratio Current ratio Quick ratio Receivable turnover Inventory turnover 0.42 3.26 0.82 15.18 2.49 0.44 10.14 1.11 22.50 9.35 10 Solvency and equity position 12 Debt/equity ratio 0.26 0.09 Market tests 13 Price/earnings ratio Dividend yield ratio 1.77 11.67 9.82 X% 13.9 % The 2015 financial statements for the Ernst and Young companies are summarized here: Ernst Company Company Balance sheet Cash Accounts receivable (net) $ 42,000 39.400 99,700 141,800 85,000 $ 21,800 32,800 40,100 402,000 306,200 Operational assets (net) Other assets Total assets $ 407,900 $ 802,900 Current liabilities Long-term debt (916) Capital stock (par $10) $ 98,900 63.100 149,700 30.400 65,800 49,000 59,800 510,600 105,400 78,100 ca al in excess of par Retained earnings Total liabilities and stockholders' equity 407,900 $ 802,900 Income statement Sales revenue (1/3 on credit) Cost of goods sold Expenses (including interest and income tax) 448,500 (241,500) $ 803,000 (399,700) (311,500) Net income 190,900 $ 91,800 Selected data from the 2014 statements Accounts receivable (net) $ 19.700 94,600 61,200 $ 38,600 45,500 48,800 Long-term debt Other data Per share price at end of 2015 (offering price23 Average income tax rate Dividends declared and paid in 2015 30% 30% $ 33,200 $149,100 The companies are in the same line of business and are direct competitors in a large metropolitan area.Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Young is more conservative, and as its president has said, We avoid what we consider to be undue risk." Neither company is publicly held. Ernst Company has an annual audit by a CPA but Young Company does not Required 1. Complete a schedule that reflects a ratio analysis of each company. (Round your answers to 2 decimal places. Enter percentage answers rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).) YOUNG ERNS COMPANY COMPANY Ratio Tests of profitability 1. Return on equity 2. Return on assets 3% Financial leverage percentage Earnings per share 5. Profit margin 6. Tests of liquidity Fixed asset turnover Cash ratio Current ratio Quick ratio 10. Receivable turnover Inventory turnover Solvency and equity position: 12 Debt/equity ratio Market tests: 13. Price/earnings ratio 14. Dividend yield ratio
