CASE 3 FINANCIAL STATEMENT ANALYSIS

Suppose that you are considering investing in one of two companies, each in the same industry.
The most recent income statements for each company and other relevant information as
follows:

INCOME STATEMENT
Gregory Company Grace Company
Sales Php 50,000,000 Php 40,000,000
Less: Cost of Sales (30,000,000) (26,000,000)
Gross Margin 20,000,000 14,000,000
Less: Selling & admin expenses (15,000,000) (7,000,000)
Operating Income 5,000,000 7,000,000
Less: Interest expense (1,000,000) (3,000,000)
Income before taxes 4,000,000 4,000,000
Less: Income taxes (1,360,000) (1,360,000)
Net Income 2,640,000 2,640,000
Retained Earnings,beg 8,000,000 6,000,000
10,640,000 8,640,000
Less: Dividends (840,000) (1,040,000)
Retained Earnings,end Php 9,800,000 Php 7,600,000

Average total assets Php 20,000,000 Php 22,000,000

Average Common equity Php 10,000,000 Php 13,000,000
Average common shares 1,000,000 shares 1,200,000 shares
Average preferred shares* 300,000 shares 100,000 shares
Market price per common Php 5.00 Php 9.80
share

Requirement:
1. Compute the following for each company
a. Earnings per share
b. Dividend yield
c. Dividend payout ratio
d. Price earnings ratio
e. Return on assets
f. Return on shareholders’ equity

2. In which of the two companies would you invest? Explain.

Risk & Return

1.Suppose the standard deviation of the returns on the shares of stock at two different companies is exactly the
same. Does this mean that the required rate of return will be the same for these two stocks? Why?

2.The correlation between stocks A and B is 0.50, while the

c o r r e l a t i o n b e t w e e n s t o c k s A a n d C i s -0.5. You already own stock A and are thinking
of buying either stock B or stock C. If you want your portfolio tohave the lowest possible risk, would you buy
stock B or C?