Apple a Day, Inc., and Unforgettable 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, and both 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:
1. Perform a vertical analysis and prepare a common-size income statement for each firm. Compute profit margin and return on equity.
2. Discuss these results, the bonus plan for management, and loan considerations. Identify the company that is the better loan risk.
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