Apple a Day, Inc. and Health Edibles, Inc.

Apple a Day, Inc. and Health Edibles, Inc. are food catering businesses that operate in the same metropolitan area. Their customers include Fortune 500 companies, regional firms, and individuals. The two firms reported similar profit margins for the current year. Also, both firms base bonuses for managers on the achievement of a target profit margin and return on equity. Each firm has submitted a loan request to you, a loan officer for City National Bank. They have provided you with the following information:

 

Apple a Day

Healthy Edibles

Net Sales

$625,348

$717,900

Cost of goods sold

$225,125

$287,080

Gross margin

$400,223

$430,820

Operating expenses

$281,300

$371,565

Operating income

$118,923

$59,255

Gain on sale of real estate

 —

$81,923

Interest expense

$-9,333

$-15,338

Income before income taxes

$109,590

$125,840

Income tax expense

$25,990

$29,525

Net income

$83,600

$96,315

Average stockholders’ equity

$312,700

$390,560

Write a paper that completes the following tasks:

  1. Perform a vertical analysis and prepare a common-size income statement for each firm. Compute profit margin and return on equity. (Round your answers to one decimal place.)
  2. Discuss these results, the bonus plan for management, and loan considerations. Identify the company that is a better loan risk and explain why.

Your paper should meet the following requirements:

  • Be 5 pages in length, not counting the required title and reference pages. Your paper should include an introduction, a body with at least two fully developed paragraphs, and a conclusion.
  • Use minimum 3 external references.
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