Discussion of ratios (46 marks) For each ratio, students should comment on some of the following
What is the relative position of each of the corporations?
What is being measured?
What does it mean? Is this good news or bad

Section 3: Conclusions/Recommendations
Draw conclusions from the data that was gathered in the previous sections and determine the relevant position of each of the corporations in all of the analyses.
The conclusions/recommendations must address the following as a comparison between the two companies.
Summarize the overall strengths and weaknesses of each corporation?
Your final recommendation as to which company your client should invest in explaining key reasons why it is the better choice.

Bailey Ltd.
Balance Sheet
As at December 31, 2016

Cash $66,000
Accounts Receivable(net) *** 241,000
Inventory 87,000
Prepaid Expenses 12,000
Plant and Equipment(net) 792,000
$1,198,000
Accounts Payable & Accrued Liabilities $191,000
Long-term Debt 635,000
Common Shares** 50,000
Retained Earnings 322,000
$1,198,000
Bailey Ltd.
Income Statement
For the year ended December 31, 2016
Sales * $2,797,000
Cost of Goods Sold 1,790,000
Gross Margin 1,007,000
Operating Expenses 770,000
Depreciation Expense 37,000
Operating Income 200,000
Interest Expense 70,000
Income before Income Tax 130,000
Income Tax Expense 52,000
Net Income(Loss) $78,000
** Avg. common shares issued and outstanding 22,000 shares
*** A/R for 2015 was $230,000
Equity for 2015 was $310,000
total assets for 2015 was $1,050,000
inventory for 2015 85,000
dividend 2016 60,000

Snoopy Ltd.
Balance Sheet
As at December 31, 2016

Cash $27,000
Accounts Receivable(net)*** 262,000
Inventory 110,000
Prepaid Expenses 7,000
Plant and Equipment(net) 704,000
$1,110,000
Accounts Payable & Accrued Liabilities $173,000
Long-term Debt 310,000
Common Shares** 200,000
Retained Earnings 427,000
$1,110,000
** Avg. common shares issued and outstanding 25,000 shares
*** A/R for 2015 was 230,000
Equity for 2015 was $620,000
Total assets for 2015 was 1,000,000
inventory for 2015 112,000
dividend 2016 55,0

Bailey Ltd.
Balance Sheet
As at December 31, 2016

Cash $66,000
Accounts Receivable(net) *** 241,000
Inventory 87,000
Prepaid Expenses 12,000
Plant and Equipment(net) 792,000
$1,198,000
Accounts Payable & Accrued Liabilities $191,000
Long-term Debt 635,000
Common Shares** 50,000
Retained Earnings 322,000
$1,198,000
Bailey Ltd.
Income Statement
For the year ended December 31, 2016
Sales * $2,797,000
Cost of Goods Sold 1,790,000
Gross Margin 1,007,000
Operating Expenses 770,000
Depreciation Expense 37,000
Operating Income 200,000
Interest Expense 70,000
Income before Income Tax 130,000
Income Tax Expense 52,000
Net Income(Loss) $78,000
** Avg. common shares issued and outstanding 22,000 shares
*** A/R for 2015 was $230,000
Equity for 2015 was $310,000
total assets for 2015 was $1,050,000
inventory for 2015 85,000
dividend 2016 60,000

Snoopy Ltd.
Balance Sheet
As at December 31, 2016

Cash $27,000
Accounts Receivable(net)*** 262,000
Inventory 110,000
Prepaid Expenses 7,000
Plant and Equipment(net) 704,000
$1,110,000
Accounts Payable & Accrued Liabilities $173,000
Long-term Debt 310,000
Common Shares** 200,000
Retained Earnings 427,000
$1,110,000
** Avg. common shares issued and outstanding 25,000 shares
*** A/R for 2015 was 230,000
Equity for 2015 was $620,000
Total assets for 2015 was 1,000,000
inventory for 2015 112,000
dividend 2016 55,000

* all Sales made on credit

Snoopy Ltd.
Balance Sheet
As at December 31, 2016

Cash $27,000
Accounts Receivable(net)*** 262,000
Inventory 110,000
Prepaid Expenses 7,000
Plant and Equipment(net) 704,000
$1,110,000
Accounts Payable & Accrued Liabilities $173,000
Long-term Debt 310,000
Common Shares** 200,000
Retained Earnings 427,000
$1,110,000
** Avg. common shares issued and outstanding 25,000 shares
*** A/R for 2015 was 230,000
Equity for 2015 was $620,000
Total assets for 2015 was 1,000,000
inventory for 2015 112,000
dividend 2016 55,000

* all Sales made on credit

Snoopy Ltd.
Income Statement
For the year ended December 31, 2016
Sales * $2,454,000
Cost of Goods Sold 1,594,000
Gross Margin 860,000
Operating Expenses 632,000
Depreciation Expense 31,000
Operating Income 197,000
Interest Expense 43,000
Income before Income Tax 154,000
Income Tax Expense 62,000
Net Income(Loss) 92,000

* all Sales made on credit

Ratios to use

Profitability
Gross profit margin Gross profit Sales Revenue (Net sales)
EBIT Earnings before Interest & Tax Net Income + Interest + Inc. Taxes
EBIT to percentage of sales EBIT Sales Revenue (Net sales)
Net profit margin Net income Sales Revenue (Net sales)
Return on equity Net income avg Total shareholders equity
Return on assets Net income avg. Total assets
Asset turnover Sales Revenue (Net sales) avg. total assets

Liquidity (short-term)
Current ratio Current assets current liabilities
quick ratio (cash + s/t investments + A/R) current liabilities
DSO (avg. A/R net credit sales ) 365
ART Net credit sales avg. A/R
Inventory days on hand (avg. inventory CoGs ) 365
inventory turnover CoGs avg. inventory

Solvency (long-term)
Interest coverage EBIT interest expense
debt to equity ratio Total liabilities Total shareholders equity
Debt to assets Total liabilities Total Assets

Market value
Book value per share (shareholders equity preferred equity) # common shares outstanding
dividend payout Dividends paid in a year net income
EPS (net income preferred dividend) wtd avg # common shares

Financial Statement Analysis

You are a financial analyst and your client has approached you for some independent financial assistance. He is considering investing funds in common shares of a corporation and has identified two alternatives. They are both in the same industry and either could be bought for book value. Your client is requesting your advice on which would be the better investment.

As a financial analyst you will prepare a prospectus. A prospectus is a short description of the analysis and must include the following sections:
1. Title page
2. Vertical Analysis
3. Ratio Analysis
4. Conclusions/Recommendations

Your prospectus should be no more than 5 pages typed not including the title page.

Ratios to use

Profitability
Gross profit margin Gross profit Sales Revenue (Net sales)
EBIT Earnings before Interest & Tax Net Income + Interest + Inc. Taxes
EBIT to percentage of sales EBIT Sales Revenue (Net sales)
Net profit margin Net income Sales Revenue (Net sales)
Return on equity Net income avg Total shareholders equity
Return on assets Net income avg. Total assets
Asset turnover Sales Revenue (Net sales) avg. total assets

Liquidity (short-term)
Current ratio Current assets current liabilities
quick ratio (cash + s/t investments + A/R) current liabilities
DSO (avg. A/R net credit sales ) 365
ART Net credit sales avg. A/R
Inventory days on hand (avg. inventory CoGs ) 365
inventory turnover CoGs avg. inventory

Solvency (long-term)
Interest coverage EBIT interest expense
debt to equity ratio Total liabilities Total shareholders equity
Debt to assets Total liabilities Total Assets

Market value
Book value per share (shareholders equity preferred equity) # common shares outstanding
dividend payout Dividends paid in a year net income
EPS (net income preferred dividend) wtd avg # common shares

Financial Statement Analysis

You are a financial analyst and your client has approached you for some independent financial assistance. He is considering investing funds in common shares of a corporation and has identified two alternatives. They are both in the same industry and either could be bought for book value. Your client is requesting your advice on which would be the better investment.

As a financial analyst you will prepare a prospectus. A prospectus is a short description of the analysis and must include the following sections:
1. Title page
2. Vertical Analysis
3. Ratio Analysis
4. Conclusions/Recommendations