Digital Plus and Speed Network are competitors in the area of selling phone/PDA

Question

Digital Plus and Speed Network are competitors in the area of selling phone/PDA equipment. Below is financial information for both companies Selected Income Statement information: Digital Plus Net Sales Cost of Goods S401,500 ?? (a) Network $554,800 $231.000 DintG rlus" Gross Profit ?? (b) Interest expense S0 (c) Operating Net Income $49,000 ?? (k) $16,500 $232,150 ?7 (d) ? (0) Selected Balance Sheet information: Digital Plus Speed Network $22,000 $21,200 S50,000 S58,000 S 6,800 2? (m) $494,375 ? (n) S39,000 $70,000 $164,000 ?? (o) $199,000 Short term investments Current receivables Prepaid expenses Total current assets Total assets Accounts payable Accrued expenses ST debt Total current liabilities Long-term debt Total liabilities Common stock: SI par (10,000 shares) SI par (14,000 shares) S52.220 S35,000 S66,000 S 2,280 2? (c) 2? ( $75,000 S34,000 2? (g) $109,000 ?? (h) $109,000 $10,000 $14,000 Beginning retained earnings S178,000 Current retained earnings Ending Retained Eanings $227,000 ?? (i) No dividends ?? (p) No dividends 2 (4) $295,375 Total Equity ?? 0 Market Price of stock $73.50 $81.90

Explanation / Answer

5)

Gross Profit for Digital Plus = 47.94% *401,500 = $ 192,479.1

Gross Profit for Speed Network = 554,800- 231,000 = $ 323,800
Gross Profit % for Speed Network = 323,800/554,800 = 58.36%

Speed Network has better GP % than Digital Plus.

6)

EPS for Digital Plus = 49,000/10,000 = 4.9

EPS for Speed Network = Net Income / Number of shares o/s

Net Income for Speed network = 323800-16500- 232,150 = $ 75,150

EPS = 75150/ 14000 = 5.36

7)

Price for Earnings for Digital Plus = 73.50/4.9 = 15

P/E for Speed Network = 81.90/5.36 = 15.27

8)

Management can reduce the current liabilities by maintaining a good payment record with the suppliers and can also bring down its short term debt and improve the cash flows with in the company by converting account receivable to cash.

9)

Digital Plus has to improve the Gross Profit margins to what is seen in its competitor Speed Network which has more than 11% improvement over Digital Plus.Digital Plus also can improve the opreating expenses by bring down the costs associated by efficient utilization of its resources. This will ensure that Digital Plus has better Net Profit margins which can then be used to improve the EPS.

10)

Current Ratio and Quick ratio both are used to assess the liquidity situation in a company. While Current Ratio is the ratio of Current Assets to Current Liabilities, Quick Ratio is the ratio of current assest less the inventory by the current liabilities ie Quick ratio is a more cruder measure of liquidity as Inventories take time to be converted to cash. Current Ratio can be used in industries which does not require much inventories like IT services, education etc while Quick ratio is more suited to industries which require much inventory like retail, manufacturing, Oil and Gas etc.

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