The companies are in the same line of business and are direct competitors in a l

Question

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.

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).)

Explanation / Answer

Answer:

Ernst Company:

Part 1.
Stockholders’ Equity = Capital Stock + Contributed capital excess of par + Retained Earnings
Stockholders, Equity = $148,400 + $29,500 + $66,400
Stockholders’ Equity = $244,300

Return on Equity = Net Income / Stockholders Equity
Return on Equity = $188,800 / $244,300
Return on Equity = 77.2820%

Part 2:
Return on Assets = Net Income /Total Assets
Return on Assets = $188,800 / $407,200
Return on Assets = 46.37%

Part 3:
Financial Leverage = Total Debt / Total Stockholders’ Equity
Financial Leverage = 64,100 / 244,300
Financial Leverage = 26.24%

Part 4:
Earning per Share = Net Income / Stock Outstanding
Stock Outstanding = 148,400 /10 = 14,840
Earning per Share = 188,800 / 14,840
Earning per Share = $12.72

Young Company:

Part 1:
Stockholders’ Equity = Capital Stock + Contributed capital excess of par + Retained Earnings
Stockholders, Equity = $510,400 + $105,500 + $79,500
Stockholders’ Equity = $695,400

Return on Equity = Net Income / Stockholders Equity
Return on Equity = $91,300 / $695,400
Return on Equity = 13.13%

Part 2:
Return on Assets = Net Income / Total Assets
Return on Assets = $91,300 / $802,000
Return on Assets = 11.38%

Part 3:
Financial Leverage = Total Debt / Total Stockholders’ Equity
Financial Leverage = 58,500 / 244,300
Financial Leverage = 8.41%

Part 4:
Earning per Share = Net Income / Stock Outstanding
Stock Outstanding = 510,400 /10 = 51,040 Stocks
Earning per Share = 91,300 / 51,040
Earning per Share = $1.79

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