Analyzing Investment Alternatives
Assume that you inherit $10,000, which according to the terms of the bequest must be invested in a single company. After much research, you find two attractive alternatives: The Salt Company and The Pepper Company.
Required
a. On the basis of the following limited information, which of the following would you prefer (M = millions of dollars)?
|
Salt Co. |
Pepper Co. |
|
|
Total assets |
$40M |
$25M |
|
Net income |
$4M |
$4M |
b. If you then find the following additional information about each company’s liabilities, which company would you prefer? Why?
|
Salt Co. |
Pepper Co. |
|
|
Total liabilities |
$20M |
$23M |
c. If you then read a newspaper article predicting each firm’s future income6. Last year, Beth purchased a three year insurance policy for liability and related incidents costing $1,200.
7. Beth expects to have six really good months of sales revenue during the summer and six slower months. Based on last year, her purchases of coffee, pastries, and mineral water during the peak months averaged about $2,000 each month. During the slower months, these items cost about $1,400 each month.
8. During peak months, Beth generally collected $4,500 each month, and during slower months she collected $3,000.
Required
a. Identify the amount of annual revenues and expenses that would be expected for each of the items above. Construct a single step income statement for Beth’s Espresso Cart for the next year.
b. What should Beth consider as she makes plans for next year? What other items should be considered for inclusion in her income statement? Why?
c. Why is an income statement useful to Beth? Discuss how the income statement may be more useful than a checkbook listing each cash inflow and outflow? prospects, which firm is now preferable? Why?
|
Salt Co. |
Pepper Co. |
|
|
Next year’s predicted net income |
$1M |
$10M |
d. Write a short memo describing any additional information that you might find helpful in making an investment in either of the two companies.