Question
Two companies that operate in the same industry as competitors are being evaluated by a bank that can finance only one of them. Summary information
- Two companies that operate in the same industry as competitors are being evaluated by a bank that can finance only one of them. Summary information from the financial statements of the two companies follows:
Data from the current year-end statements of financial position
| Keroki Company | Aviana Company |
| Ksh000 | Ksh000 |
Assets |
|
|
Cash | 18,700 | 33,000 |
Accounts receivable | 34,500 | 53,800 |
Notes receivable | 8,500 | 6,000 |
Merchandise inventory | 88,600 | 119,700 |
Prepaid expenses | 4,200 | 6,200 |
Property, plant and equipment | 284,100 | 288,600 |
| 438,600 | 507,300 |
|
|
|
Liabilities and Equity |
|
|
Current liabilities | 60,300 | 94,700 |
Long term notes payable | 80,000 | 100,000 |
Ordinary shares of Sh.10 par value | 175,000 | 180,000 |
Retained earnings | 123,300 | 132,600 |
Total liabilities and equity | 438,600 | 507,300 |
Data from the current years income statements
Sales | 625,000 | 780,500 |
Cost of goods sold | 372,500 | 465,200 |
Financing costs | 8,000 | 11,000 |
Income tax expense | 13,800 | 21,900 |
Net income | 75,300 | 95,800 |
Beginning-of- year data
Accounts receivable | 28,800 | 52,900 |
Notes receivable | 0 | 0 |
Merchandise inventory | 54,900 | 101,000 |
Total assets | 388,100 | 422,500 |
Ordinary share of Sh.10 par value | 175,000 | 180,000 |
Retained earnings | 100,500 | 90,800 |
Required:
- Calculate current ratios, acid-test ratios, average accounts receivable collection period ratios, average sales period ratios for the two companies. Identify the company that you consider to be the better short-term credit risk and explain why. (15 marks)
- Calculate profit margins, total asset turnovers, return on total assets and return on ordinary shareholders equity. Assuming that each company paid cash dividends of Sh.3 per share and each companys share can be purchased at Sh.40 per share, calculate their price earnings ratios and the dividend yield. Identify which companys shares you would recommend as the better investment and explain why. (15 marks)
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