Problem 16-53 Profitability Analysis for an Investment Decision

Suppose that you are considering investing in one of two companies, each in the same industry. The most recent income statements for each company and other relevant information are as follows:

 

Income Statements (in thousands)

 

Â	McGregor Company	Fasnacht Company
Sales	$ 50,000	$ 40,000
Less: Cost of goods sold	(30,000)	(26,000)
Gross margin	$ 20,000	$ 14,000
Less: Selling and administrative expenses	(15,000)	(7,000)
Operating income	$   5,000	$   7,000
Less: Interest expense	(1,000)	(3,000)
Income before taxes	$   4,000	$   4,000
Less: Income taxes	(1,360)	(1,360)
Net income	$   2,640	$   2,640
Retained earnings	8,000	6,000
Â	$ 10,640	$   8,640
Less: Dividends	(840)	(1,040)
Ending retained earnings	$   9,800	$   7,600
  Average total assets	  $20,000,000	  $22,000,000
Average common equity Average common shares Average preferred shares* Market price per common share	$10,000,000 1,000,000 shares 300,000 shares $5.00	$13,000,000 1,200,000 shares 100,000 shares $9.80

* For both McGregor and Fasnacht, the preferred dividend is $1 per share.

 

Required:

Note: Round answers to two decimal places.

1.       Compute the following for each company: (a) earnings per share, (b) dividend yield, (c) divi- dend payout ratio, (d) price-earnings ratio, (e) return on assets, and (f) return on stockholders’ equity.

2.       CONCEPTUAL CONNECTION In which of the two companies would you invest? Explain.