Following are data collected from financial statements of Cathay Trading Inc. and Peony Wholesale Co. located in Hong Kong, China (currency in millions Hong Kong Dollar, HK$):
Cathay Trading Inc. Peony Wholesale Co.
Balance Sheet Data:
Total assets HK$ 4,338 HK$ 14,000
Interest-bearing debt HK$ 1,257 HK$ 13
All other liabilities 2,675 2,605
Shareholders’ equity 406 11,382
Total liabilities and equity HK$ 4,338 HK$ 14,000
Income Statement data:
Total revenue HK$ 11,000 HK$ 3,800
Interest expense 75 6
Net income HK$ 190 HK$ 1,230
- Before performing any calculations, which company do you think represents the better investment? Give your reason.
- Compute the EVA®. for each company and then decide which company’s shares you would rather hold as an investment. Assume both companies’ cost of capital is 8.5% and use unadjusted net income in your calculations.