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1. Two companies that operate in the same industry as competitors are being evaluated by a bank that can finance only one of them. Summary information from the financial statements of the two companies follows:

Data from the current year-end statements of financial position

	Keroki Company	Aviana Company
	Ksh000	Ksh000
Assets
Cash	18,700	33,000
Accounts receivable	34,500	53,800
Notes receivable	8,500	6,000
Merchandise inventory	88,600	119,700
Prepaid expenses	4,200	6,200
Property, plant and equipment	284,100	288,600
	438,600	507,300
Liabilities and Equity
Current liabilities	60,300	94,700
Long term notes payable	80,000	100,000
Ordinary shares of Sh.10 par value	175,000	180,000
Retained earnings	123,300	132,600
Total liabilities and equity	438,600	507,300

Data from the current years income statements

Sales	625,000	780,500
Cost of goods sold	372,500	465,200
Financing costs	8,000	11,000
Income tax expense	13,800	21,900
Net income	75,300	95,800

Beginning-of- year data

Accounts receivable	28,800	52,900
Notes receivable	0	0
Merchandise inventory	54,900	101,000
Total assets	388,100	422,500
Ordinary share of Sh.10 par value	175,000	180,000
Retained earnings	100,500	90,800

Required:

1. Calculate current ratios, acid-test ratios, average accounts receivable collection period ratios, average sales period ratios for the two companies. Identify the company that you consider to be the better short-term credit risk and explain why. (15 marks)

2. Calculate profit margins, total asset turnovers, return on total assets and return on ordinary shareholders equity. Assuming that each company paid cash dividends of Sh.3 per share and each companys share can be purchased at Sh.40 per share, calculate their price earnings ratios and the dividend yield. Identify which companys shares you would recommend as the better investment and explain why. (15 marks)

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