Recovering Accountacholics Tara Neil* Gary Snyder Adriana Guerrero Maria Lozano Group Activity #2 (a)

Ratio Analysis 1. Gross profit for 2008= Net Income/Net Sales 2. Percent change in operating income 2007-2008= Current operating income previous period operating income/previous period operating income. 3. Accounts receivable turnover for 2008= Net Credit Sales/Average Net Receivables 4. Days sales in receivable for 2008=365/Accts Rec. Turnover 5. Inventory turnover ratio for 2008= Cost of Goods Sold/Average Inventories 6. Days inventory on hand for 2008 365/ Inventory turnover ratio 7. Increase(decrease PepsiCo $5142/$43,251=11.9% Coca-Cola $5.807/31.944= 18.2%

7824-7253 = 571 571/7253 = 0.078 ( 100) = 7.9 %

(8446-7252) = 1194 1194/ 7252 = 0.1646 (100) = 16.5%

$43,251/ ( $4,683 + $4,389)/2 = 9.5 times

31,944/ ($3,090 + $3,317) / 2 = 10.0 times

365/ 9.5 = 38.4 days $20,351/ (2,522 + $2,290)/ 2 = 8.5 times

365/ 10.0 = 36.5 days $11,374/ ($2,187 + $2,220)/ 2 = 5.2 times

365/ 8.5 = 42.9 days

365/5.2 = 70.2 days

$2064 $910 = $1.154

$4701-$4093 = $608

) in cash and cash equivalents from 2007-2008 8. Return on assets for 2008= Return on Assets = Net Income/Average Assets 9. Working capital at end of 2008= Current Assets Current Liabilities 10.Current ratio at end of 2008= Current Ratio = Current Assets/Current Liabilities 11.Debt to total assets end of 2008= Total Debt/Total Assets 12.Book value per share end of 2008= Total Stockholders Equity/# common shares outstanding 1. Compare market value per share to book value per share end 2008 Market value = stock price per share close fourth quarter 2008 $54.56 Cola : 45.27
Price Earnings Ratio : Market Value per Share Earnings per Share (EPS)

$5142/(35994 + 34628)/2 = 14.6%

5807/(40519+43269 )/2 = 13.8%

$10.806 $8.787 = $2019 $10.806/$8.787 = 1.2

$12.176-$12.988= -$812

$12.176/$12.988= 0 .9

$23,888/$35,994 = 0.66(100) = 66.4 % 12203/1782 = 6.8

$20,047/ $40,519= 0.49(100) = 49.5% 20472/2312= 8.9

54.56/3.21= 17.0

$45.27 / 2.16 = 21.0

2. 3. Define book value and market value

Book Value Book value is useful in determining the trend of a stockholders per share

Market value per share may exceed book value per share, but that fact does not necessarily

equity in a corporation. Book Value is the value of a security asset as entered in a companys books. The net asset value of a company is calculated by total assets minus intangible assets (patents, goodwill) and liabilities. Market Value is the amount for which something can be sold on a given market. 4. Return on common stockholders equity end 2008= Net Income/Average Common Stockholders Equity $5142- $2/($12203 + $17325/2= ($5140/$14764)(100) = 34.8 %

mean that the stock is overpriced. Market Value reflects the subjective judgments of thousands of stockholders and prospective investors about a companys potential for future earnings and dividends.

(5807-$0)/ ($20472+21744)/2= (5807 / 21108) (100) = 27.5 %

(b) What conclusions concerning the relative profitability, liquidity, long run solvency, and the efficiency of assets can be drawn from your analysis above? Profitability is measured with income and expenses. Income is money generated from the activities of the business. Expenses are the cost of resources used up or consumed by the activities of the business. Measuring profitability is the most important measure of the success of the business. A business that is not profitable cannot survive. Also, a business that is highly profitable has the ability to reward its owners with a large return on their investments. Gross Profit finds the sales performance, profitability of a company. It indicates the level of reduction in prices of goods to be sold without incurring any

losses on the current operations. Higher gross profit ratio shows the high efficiency of a company in domain of productivity. Pepsi is 11.9, as Coca-Cola is 18.2. Coca- Cola is higher which makes it more profitable. ROA tells us how effectively the company is able to convery the investments into its net income. If the ROA is high, the earning of a company is high. Pepsi is 14.6, where as Coca- Cola is 13.8. So, Pepsi would be the better choice. Accounts receibable turnover measures the efficiency of a business in collecting its credit sales. A high value of accounts receivavle turnover is favorable and lower figure may idicate ineffiicency in collecting outstanding sales. Pepsi is 9.5times, where as Coca-Cola is 10.0 times. So Cola would be the better choice. Liquidity is the ability convert an asset to cash quickly. It is the amount of capital that is available for investment and spending. Businesses uses liquid ratios to calcualte their finanical health. The three common ratios are Current Ratios, Quick Ratios and Cash Ratios. Current Ratio determines whether a company could pay off all its short term debt with the money it got from selling its assets. The higher the current ratio, the more capable the company is of paying its obligations. Pepsi is 1.2, where as Cola is 0.9.

In evaluating long run solvency, we are going to focus in the debt to total assets and the current ratio. With solvency, we will measure if

a business can cover its total debts againts its assets. Solvency, has a long run measure that indicates wheter the business has liquidity to cover its long therm debts. Using the financial information reported we can deduct that Coca Cola has low long term solvency risk, which means that can generate more cash flow to pay for its long term debt on the due date. The debt to total assets for Coca Cola at the end of 2008 was 49%. Pepsi Co debt to total assets was 66% showing that needs to improve in long run solvency. However, Pepsi Co, does not deal with the ability to meet short term debt, because its current ratio is above 1.0 which determine that Pepsi Co has the solvency to meet its short term debt obligation, and sufficient short-term assets to meet the short- term liabilities. To show how efficiently the assets for these companies are being used to generate sales revenues, we analyzed the account receivables turnover to measure the productivity of the business performing and the ability to generate sales. A company that has more revenue will manage its liabilities better. Pepsi Co accounts receivable turnover is 9.54 times and Coca Cola is 9.97 times, a higher receivable turnover is better, making Coca Cola more efficient in converting its resources or assets into sales in the 2008 year.

(C) Using information from your analysis (state which parts of the analysis are being used), would the group recommend purchasing the stock of PepsiCo or Coca-Cola?

Overall for the year of 2008, Pepsi Co was doing better than Coca Cola in the beverage industry. The return on common stockholders for Pepsi Co. was 34.8% and Coca Cola 27.5%, this ratio indicates how profitable a company could be. Looking at the net income and the

average shareholders' equity, we can measure which company is able to take the investment made by the stockholders and convert that investment into earnings. Clearly, Pepsi Co, has the higher ratio percentage, and has used its equity base to give a better return to its investors for the year of 2008. Another way we determine that Pepsi Co, was better company in 2008, is because we look at the dividends and found them more attractive. The working capital for Pepsi Co was better, and had higher asset turnover, return on assets and subsequently higher return on common stockholders equity. Coca Colas debt equity was better and shows that it will be able to pay for its long term debt. However, for 2008 year, we would recommend Pepsi Co because the companys earnings performance represents attractive levels of return for its investors.