Question

Preparation of Income Statement: Which Firm’ shareholders are wealthier? A or B? Explain.

Particulars	A	B
Revenue (A)	4500	4500
COGS @60% (B) (A*60%)	4500*60%=(2700)	4500*60%=(2700)
Gross profit (C) (A-B)	1800	1800
Operating expenses (D)	(300)	(300)
EBIT (E) (C-D)	1500	1500
Interest expense (F)	0	(500*7%)=35
EBT (G) (E-F)	1500	1465
Income tax @28% (H)	1500*28%=(420)	1465*28%=(410)
Net Income (I) (G-H)	1080	1055
Earnings per share	1.08	2.11
Dividend per share	0.432	0.844
Expected return on equity	14.7%	19.2%
Estimated share price	3.470	5.005
Market value of equity	3470	2502
Market value of debt	0	550
Enterprise value	3470	3052

Answer 1