Solutions to exam Financial Statement Analysis June 23, 2011
Question 1
(25 points)
Number of points for this question is calculated as follows:
#points = 5 × max(#correct answers − 5, 0).
This takes into account that, by guessing, 50% of the statements would have been answered
correctly on average.
A
False, the present value of all future residual operating income is equal to the present
value of all future residual income
B
False, such firms are likely to be overvalued.
C
True, all you need for an SF2 forecast is residual operating income for the current
year.
D
True, investments reduce the free cash flow.
E
True. See lecture 7.
F
False, whether the market to book ratio is less than one depends on the market’s
beliefs about the firm’s future performance and not on the value of the firm’s retained
earnings.
G
True, SF3 forecasts assume that the current RNOA persists in the future. Hence,
to forecast residual operating income one needs to know how NOA changes in the
future.
H
True, the hidden dirty surplus loss is part of comprehensive income that is reported
on both the reformulated equity statement and reformulated income statement.
I
True. See lecture 6.
J
True. See lecture 1.
Question 2
(25 points)
A maximum of 4, 4, 6, 6, and 5 points can be earned for parts A, B, C, D, and E respectively.
2 points have been subtracted for each calculation error.
A The normal trailing P/E ratio is defined as (1 + r)/r. Hence, it equals 1.104/0.104 =
10.62.
B It holds that forward P/E ratio is equal to market value divided by forecasted earnings
for 2011, that is, 10.47 = 838.2/E2011 . Rearranging terms yields E2011 = 838.2/10.47 =
80.06 million.
1
Alternative solution: forward P/E ratio equals share price divided by forecasted earnings per share for 2011, that is, 10.47 = 35.90/EP S2011 . Rearranging terms yields
EP S2011 = 35.90/10.47 = 3.43. This corresponds to E2011 = 3.43 × 23.3 = 79.92
million. Differences with the solution above are due to rounding errors.
C
2010
2011
2012
2013
2014
2015
718.3
776.3
836.9
900.1
966.0
1,034.7
Et
74.2
76.6
79.2
81.8
84.5
87.3
dt
18.6
18.6
18.6
18.6
18.6
18.6
1.9
-1.5
-5.2
-9.1
-13.2
BVt
RIt
PV of RIt
-17.5
CV
-162.4
PV of CV
-99.0
Observe that RIt = Et − 10.4% × BVt−1 , BVt = BVt−1 + Et − dt and that CV =
RI2015 ×(1+g)
r−g
=
−13.2×1.021
.104−.021
= −162.4. Firm value then equals VE = 718.3 − 17.5 − 99.0 =
601.8 million.
D Reverse engineering is applied to the valuation formula: VE = BV2010 +
RI2010 ×(1+g)
.
r−g
Hence, one first needs to calculate RI2010 . It holds that RI2010 = E2010 − r × BV2009 .
Using that BV2009 = BV2010 + d2010 − E2010 = 662.7 it follows that RI2010 = 74.2 −
0.104 × 662.7 = 5.3. Substituting VE = 838.2, BV2010 , RI2010 , and r in the valuation
equation, one obtains
838.2 = 718.3 +
5.3 × (1 + g)
.
0.104 − g
Rearranging terms yields g =
0.104(838.2−718.3)−5.3
838.2−718.3+5.3
= 0.0573 = 5.73%.
E
2010
2011
2012
718.3
779.9
848.0
Et
74.2
80.2
86.7
dt
18.6
18.6
18.6
5.3
5.5
5.6
BVt
RIt
Observe that RIt+1 = 1.03 × RIt , Et = RIt + r × BVt−1 and BVt+1 = BVt + Et − dt .
Hence, growth in earnings equals
80.2−74.2
74.2
2012 respectively.
2
= 8.1% and
86.7−80.2
80.2
= 8.1% for 2011 and
Question 3
(25 points)
A maximum of 9, 8, and 8 points can be earned for parts A, B, and C, respectively. 2 points
have been subtracted for each misclassification or forgotten item.
A
Reformulated income statement
Revenue
5,912
Operating expenses
(5,085)
Operating income from sales (pre-tax)
Reported income tax
827
(295)
Tax on other OI
116
Tax benefit on NFE
(20)
Tax on operating income from sales
(199)
Operating income from sales (after tax)
628
Litigation settlement income
269
Share of results of joint ventures and associates
32
Profit on disposal of available for sale investment
Tax on other
OI1
116
Exchange differences on translation of foreign operations2
Gains on cash flow
115
hedge2,5
8
51
Other operating income
359
Operating income
987
Investment income
3
Finance cost
Investment income on litigation
(122)
settlement3
Tax benefit on NFE4
49
20
Gain on revaluation of available for sale
investment2
2
Net financing expense
(48)
Comprehensive income
939
1
28.0% × (269 + 32 + 115) = 116
2
Taken from equity statement
3
May also be classified as other operating income
4
28.0% × (122 − 3 − 49) = 20
5
May also be classified as financing income
3
4
B
Reformulated balance sheet (June 30, 2010)
Operating assets:
Goodwill
852
Intangible assets
336
Property, plant and equipment
899
Investments in joint ventures and associates
149
Trade and other receivables
556
Inventories
343
Total operating assets
3,135
Operating liabilities:
Trade and other payables
1,578
Current tax liabilities
136
Provisions
38
Deferred tax liability
7
Total operating liabilities
1,759
Net operating assets
1,376
Financial assets:
Short-term deposits
400
Cash and cash equivalents
649
Derivative financial assets
438
Available-for-sale investments
182
Total financial assets
1,669
Financial liabilities:
Derivative financial liabilities
27
Borrowings
2,458
Total financial liabilities
2,485
Net financial obligations
816
Share capital
876
Share premium
1,437
Retained earnings
(2,243)
Reserves
490
Common shareholders’ equity
560
5
C
Cash flows from operating activities:
Cash generated from operations
1,634
Taxation paid
(320)
Tax benefit on net interest paid
(28)
Net cash from operating activities (C)
1,286
Cash flows from investing activities:
Dividends received from joint ventures and associates
Net funding to joint ventures and associates
(30)
1
Proceeds on disposal of an investment
(196)
Purchase of property, plant and equipment
261
Purchase of intangible assets
183
Proceeds on disposal of property, plant and equipment
Net cash used in investing activities (I)
(1)
218
Tax benefit on net interest paid is calculated as follows:
Interest paid
156
Interest received
(57)
Tax benefit: 28.0% × (156 − 57) =
(28)
Net interest paid
71
From this it follows that C − I = 1, 286 − 218 = 1, 068.
For completenes sake, the remainder of the reformulated cash flow statement is:
Cash flows from financing activities
(Increase) decrease in short-term deposits
310
Repayment of borrowings
495
Net interest paid
71
Decrease in cash and cash equivalents
(162)
Cash flows from financing activities (F)
714
Proceeds from disposal of shares in ESOP
Purchase of own shares for ESOP
(16)
56
Dividends paid to shareholders
314
Net transaction with shareholders (d)
354
Notice that F + d = 754 + 314 = 1, 068 = C − I.
6
Question 4
(25 points)
A maximum of 6, 6, 6, and 7 points can be earned for parts A, B, C, and D, respectively. 2
points have been subtracted for each calculation error.
A It holds that
ROCE = 206.1/(0.5 ∗ 842.5 + 0.5 ∗ 1, 048.3) = 21.8%
RN OA = (234.2 − 2.6)/(0.5 ∗ 1, 482.3 + 0.5 ∗ 1, 676.1) = 14.7%
N BC = 25.5/(0.5 ∗ 639.8 + 0.5 ∗ 627.8) = 4.0%
F LEV
= (0.5 ∗ 639.8 + 0.5 ∗ 627.8)/0.5 ∗ 842.5 + 0.5 ∗ 1, 048.3) = 0.67%
so that
ROCE = RN OA + F LEV × (RN OA − N BC)
= 14.7% + 0.67 × (14.7% − 4.0%)
= 21.86%
3 points have been subtracted if you did not use yearly average values.
B It holds that
P M sales = 234.2/4, 472.7 = 5.24%
P M other OI = −2.6/4, 472.7 = −0.06%
AT O = 4, 472.7/(0.5 ∗ 1, 482.3 + 0.5 ∗ 1, 676.1) = 2.83
C For the SF3 forecast it holds that ReOI2011 = (CoreRN OA2010 − rF ) × N OA2010 .
So, the additional information required is the cost of operations rF (presuming that
CoreRN OA is core operating income from sales). Note that the growth rate in NOA is
not needed for the 2011 forecast. It is needed to forecast ReOI for the years 2102 and
beyond.
D Two important observations can be made:
– In 2010, $ 308.0 is reported in current maturities of long term debt. This means
that Radioshack has to repay this debt in 2011.
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– Even though Radioshack made a profit in 2010, retained earnings decreased considerably in 2010. It is important to know what was driving this decrease in retained
earnings. Did Radioshack pay a huge dividend or did they repurchase a lot of
shares?
8