CONNECT F/ INTERMEDIATE ACCTING>I<
10th Edition
ISBN: 9781260951585
Author: SPICELAND
Publisher: MCG
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Textbook Question
Chapter 4, Problem 4.13P
Use of ratios to compare two companies in the same industry
• LO4–10
Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry—Johnson and Johnson (J&J) and Pfizer, Inc. ($ in millions, except per share amounts).
Required:
Evaluate and compare the two companies by responding to the following questions. Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate.
1. Which of the two companies appears more efficient in collecting its
2. Which of the two firms had greater earnings relative to resources available?
3. Have the two companies achieved their respective
4. From the perspective of a common shareholder, which of the two firms provided a greater rate of return?
5. From the perspective of a common shareholder, which of the two firms appears to be using leverage more effectively to provide a return to shareholders above the rate of return on assets?
Balance Sheets
($ in millions, except per share data)
| J&J | Pfizer | |
| Assets: | ||
| Cash | $ 5,377 | $ 1,520 |
| Short-term investments | 4,146 | 0,432 |
| Accounts receivable (net) | 6,574 | 8,775 |
| Inventories | 3,588 | 5,837 |
| Other current assets | 3,310 | 3,177 |
| Current assets | 22,995 | 29,741 |
| Property, plant, and equipment (net) | 9,846 | 18,287 |
| Intangibles and other assets | 15,422 | 68,747 |
| Total assets | $ 48,263 | $116,775 |
| Liabilities and Shareholders’ Equity: | ||
| Accounts payable | $ 4,966 | $ 2,601 |
| Short-term notes | 1,139 | 8,818 |
| Other current liabilities | 7,343 | 12,238 |
| Current liabilities | 13,448 | 23,657 |
| Long-term debt | 2,955 | 5,755 |
| Other long-term liabilities | 4,991 | 21,986 |
| Total liabilities | 21,394 | 51,398 |
| Capital stock (par and additional paid-in capital) | 3,120 | 67,050 |
| 30,503 | 29,382 | |
| Accumulated other comprehensive income (loss) | (590) | 195 |
| Less: |
(6,164) | (31,250) |
| Total shareholders’ equity | 26,869 | 65,377 |
| Total liabilities and shareholders’ equity | $ 48,263 | $116,775 |
| Income Statements | ||
| Net sales | $ 41,862 | $ 45,188 |
| Cost of goods sold | 12,176 | 9,832 |
| Gross profit | 29,686 | 35,356 |
| Operating expenses | 19,763 | 28,486 |
| Other (income) expense—net | (385) | 3,610 |
| Income before taxes | 10,308 | 3,260 |
| Tax expense | 3,111 | 1,621 |
| Net income | $ 7,197 | $ 1,639* |
| Basic net income per share | $2.42 | $ 0.22 |
* This is before income from discontinued operations.
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Homemade Leverage [LO1] The Day Company and the KnightCompany are identical in every respect except that Day is notlevered. Financial information for the two firms appears in thefollowing table. All earnings streams are perpetuities, and neitherfirm pays taxes. Both firms distribute all earnings available tocommon stockholders immediately.Day KnightProjected operating income $ 375,000 $ 375,000Year-end interest on debt — $ 54,000Market value of stock $2,300,000 $1,650,000Market value of debt — $ 900,000An investor who can borrow at 6 percent per year wishes topurchase 5 percent of Knight’s equity. Can he increase hisdollar return by purchasing 5 percent of Day’s equity if heborrows so that the initial net costs of the strategies are thesame?Given the two investment strategies in (a), which willinvestors choose? When will this process cease?
A5 7h
Q Corporation and R Inc. are two companies with very similar characteristics. The only difference between the two companies is that Q Corporation is an unlevered firm, and R Inc. is a levered firm with debt of $3.5 million and cost of debt of 10%. Both companies have earnings before interest and taxes (EBIT) of $1.5 million and a marginal corporate tax rate of 35%. Q Corporation has a cost of capital of 15%.
h. Compare the WACC of the two companies. What is your conclusion?
Problem 17-5A Comparative ratio analysis LO P3
Skip to question
[The following information applies to the questions displayed below.] Summary information from the financial statements of two companies competing in the same industry follows.
BarcoCompany
KyanCompany
BarcoCompany
KyanCompany
Data from the current year-end balance sheets
Data from the current year’s income statement
Assets
Sales
$
770,000
$
897,200
Cash
$
19,000
$
30,000
Cost of goods sold
594,100
642,500
Accounts receivable, net
34,400
57,400
Interest expense
8,100
18,000
Merchandise inventory
84,740
140,500
Income tax expense
14,800
24,769
Prepaid expenses
5,900
7,150
Net income
153,000
211,931
Plant assets, net
310,000
305,400
Basic earnings per share
4.50
5.41
Total assets
$
454,040
$
540,450
Cash dividends per share
3.82
3.93
Liabilities and Equity…
Chapter 4 Solutions
CONNECT F/ INTERMEDIATE ACCTING>I<
Ch. 4 - The income statement is a change statement....Ch. 4 - What transactions are included in income from...Ch. 4 - Prob. 4.3QCh. 4 - Prob. 4.4QCh. 4 - Prob. 4.5QCh. 4 - What are restructuring costs and where are they...Ch. 4 - Define intraperiod tax allocation. Why is the...Ch. 4 - How are discontinued operations reported in the...Ch. 4 - What is meant by a change in accounting principle?...Ch. 4 - Prob. 4.10Q
Ch. 4 - The correction of a material error discovered in a...Ch. 4 - Define earnings per share (EPS). For which income...Ch. 4 - Prob. 4.13QCh. 4 - Describe the purpose of the statement of cash...Ch. 4 - Prob. 4.15QCh. 4 - Explain what is meant by noncash investing and...Ch. 4 - Distinguish between the direct method and the...Ch. 4 - Prob. 4.18QCh. 4 - Prob. 4.19QCh. 4 - Show the calculation of the following...Ch. 4 - Show the DuPont frameworks calculation of the...Ch. 4 - Prob. 4.22QCh. 4 - Prob. 4.23QCh. 4 - Prob. 4.1BECh. 4 - Prob. 4.2BECh. 4 - Prob. 4.3BECh. 4 - Prob. 4.4BECh. 4 - Prob. 4.5BECh. 4 - Prob. 4.6BECh. 4 - Prob. 4.7BECh. 4 - Prob. 4.8BECh. 4 - Prob. 4.9BECh. 4 - Prob. 4.10BECh. 4 - Prob. 4.11BECh. 4 - Prob. 4.12BECh. 4 - Statement of cash flows; indirect method LO48 Net...Ch. 4 - Prob. 4.14BECh. 4 - Prob. 4.15BECh. 4 - Prob. 4.3ECh. 4 - Prob. 4.4ECh. 4 - Prob. 4.5ECh. 4 - Prob. 4.6ECh. 4 - Prob. 4.7ECh. 4 - Prob. 4.8ECh. 4 - Prob. 4.9ECh. 4 - Prob. 4.12ECh. 4 - Prob. 4.15ECh. 4 - Prob. 4.23ECh. 4 - Concepts; terminology LO41, LO42, LO43, LO44,...Ch. 4 - Inventory turnover; calculation and evaluation ...Ch. 4 - Prob. 4.29ECh. 4 - Prob. 4.30ECh. 4 - Prob. 4.31ECh. 4 - Prob. 4.32ECh. 4 - Prob. 4.1PCh. 4 - Prob. 4.2PCh. 4 - Prob. 4.3PCh. 4 - Prob. 4.4PCh. 4 - Prob. 4.5PCh. 4 - Prob. 4.6PCh. 4 - Prob. 4.7PCh. 4 - Prob. 4.8PCh. 4 - Prob. 4.9PCh. 4 - Prob. 4.11PCh. 4 - Prob. 4.12PCh. 4 - Use of ratios to compare two companies in the same...Ch. 4 - Prob. 4.15PCh. 4 - Prob. 4.16PCh. 4 - Prob. 4.1DMPCh. 4 - Judgment Case 42 Restructuring costs LO43 The...Ch. 4 - Prob. 4.3DMPCh. 4 - Prob. 4.4DMPCh. 4 - Prob. 4.5DMPCh. 4 - Prob. 4.6DMPCh. 4 - Prob. 4.7DMPCh. 4 - IFRS Case 48 Statement of cash flows;...Ch. 4 - Judgment Case 49 Income statement presentation;...Ch. 4 - Prob. 4.10DMPCh. 4 - Prob. 4.13DMPCh. 4 - Prob. 4.15DMPCh. 4 - Prob. 4.17DMPCh. 4 - Prob. 4.18DMPCh. 4 - Prob. 2CCTC
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