Part One:
Companies A and B are direct competitors in their market. Each has just announced year-end results as follows:
COMPANY A:
Value of company assets: $120,500,000
Total of company liabilities: $60,500,000
Net Income: $10,600,000
Common Stock Dividends: $2,500,000
Preferred Stock Dividends: $4,000,000
Number of common shares outstanding: 1,000,000
Current Stock Price: $100.00 per share
COMPANY B:
Value of company assets: $1,000,000
Total of company liabilities: $0
Net Income: $75,000
Common Stock Dividends: $25,000
Preferred Stock Dividends: None
Number of common shares outstanding: 100,000
Current Stock Price: $10.00 per share
First, make the following calculations:
A. Book value per share.
B. Earnings per share.
C. Dividend yield.
D. Price/Earnings Ratio.
E. Market-to-book ratio.
Assume that both companies are in the same business and compete directly with each other. BASED ON YOUR FINANCIAL ANALYSIS OF THIS VERY LIMITED INFORMATION, IN WHICH COMPANY WOULD YOU PREFER TO INVEST?
EXPLAIN. Think critically, as if you were investing your own, hard-earned money. Be sure to address how each of the calculations (A-E) affects your analysis. Also, explain how the sheer size difference (asset amount) and relative amounts of debt (financial risk) affect your decision.
Part Two:
Response should be at least 1 – 2 complete paragraphs including in-depth content that demonstrates knowledge of the subject matter. Be sure to use correct grammar and spelling.
If you had $50,000 to invest in the stock market, how would you go about reducing your risk exposure? Ex. How many different stocks of what types?
Explain.
