You are working in an investment company as a trainee financial analyst. The company has funds available and has narrowed the choice of investment to two publicly listed companies Gamma plc and Alpha plc. The financial data about the two companies has been compiled and presented to you:
Selected income statement data for the current year:
Gamma plc Alpha plc
Net Sales Revenue (all on credit) £ 507,642 £ 592,614
Cost of Goods Sold 252,000 312,000
Interest Expense – 22,800
Net Income 61,200 86,400
Selected balance sheet and market price data at the end of the current year:
Gamma plc Alpha plc Current Assets:
Cash £ 30,000 £ 20,400
Short-term Investments 50,000 16,800
Accounts Receivable, Net 50,000 57,600
Merchandise Inventory 82,500 116,400
Prepaid Expenses 28,750 14,400
Total Current Assets 241,250 225,600
Total Assets 332,500 387,600
Total Current Liabilities 131,250 115,200
Total Liabilities 131,250 153,600
Common Stock:
£1 par (12,000 shares) 12,000
£1 par (17,000 shares) 17,000
Total Stockholders’ Equity 201,250 234,000
Market Price per Share of Common Stock 95.63 137.38
Dividends Paid per Common Share £1.375 1.2
Selected balance sheet data at the beginning of the current year:
Gamma plc Alpha plc Balance Sheet:
Accounts Receivable, net £ 49,200 £ 64,800
Merchandise Inventory 97,200 104,400
Total Assets 313,200 326,400
Common Stock:
£1 par (12,000 shares) 12, 000
£1 par (17,000 shares) 17,000
The company’s normal strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially.
Assume that the two companies belong to the smart phone business.
REQUIRED:
- Applying the CORE framework that you studied in your module, carry out a comparative performance evaluation of the two companies. Relevant ratios relating to various categories of performance should be presented within the framework.
- Recommend additional information that would have been useful for making your analysis more robust and credible? Analyse the importance of information relating to corporate governance and CSR related disclosures of a company and how non availability of that information may impact the quality of your analysis? Also briefly evaluate any risks associated with this investment.
Additional Information
a. In the conclusion you need to make a clear recommendation to your company’s management on the suitability of the two companies for investment purpose and which one is to be preferred?
b. All facts and claims should be supported by relevant references. Avoid using generic sites/blogs for referencing purpose. Only use high quality academic references (eg journal articles and peer reviewed publications with references, professional sources (eg government publications and/or websites, reputed magazines/newspapers eg Economist, Financial Times, regulators publications eg ICAEW, CIMA, ACCA, Big four accounting firms). The Harvard referencing style should be complied with. Use of at least 15 high quality references is advised.
c. The report should be in the form of a business research report of 4000 words +10% allowance.
d. There should be an Executive Summary at the beginning of about 500 – 700 words in addition to the main report. This is not included in required word count.
e. The deadline for submission of the research report
