Postgraduate Centre
MBF 2253 Modern Security Analysis
Assignment 1 – 30%
This assignment contains 2 questions. Answer both questions.
Q1.
The DuPont formula defines the net return on shareholders’ equity as a function of the following
components:
•
Operating margin
•
Asset turnover
•
Interest burden
•
Financial leverage
•
Income tax rate
Refer to the information presented on the financial position of Oberyn Martell Incorporated in
Table 1A below to answer the following questions.
(a).
Calculate each of the five components listed for 2009 and 2013, and calculate the return on
equity (ROE) for 2009 and 2013, using all of the five components. Show all calculations.
(b).
Briefly discuss the impact of the changes in asset turnover and financial leverage on the change
in ROE from 2009 to 2013.
Q2.
Petyr Baelish is reviewing Valyria’s financial statements in order to estimate its sustainable
growth rate. Refer to the information presented in Table 2A below to answer this question.
(a).
(1)
Identify and calculate the three components of the DuPont formula.
(2)
Calculate the ROE for 1999 using the three components of the DuPont formula.
(3)
Calculate the sustainable-growth rate for 1999.
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Petyr Baelish has calculated actual and sustainable growth for each of the past four years and
finds in each year that its calculated sustainable-growth rate substantially exceeds its actual
growth rate.
(b).
Cite two courses of action (other than ignoring the problem) Petyr Baelish should encourage
Valyria to take, assuming the calculated sustainable-growth rate continues to exceed the actual
growth rate.
Q3.
At year-end 2011, the Wall Street consensus was that Philip Morris’ earnings and dividends
would grow at 20 percent for five years after which growth would fall to a market-like 7 percent.
Analysts also projected a required rate of return of 10 percent for the U.S. equity market.
(a).
Using the data in Table 3A and the multistage dividend discount model, calculate the intrinsic
value of Philip Morris stock at year-end 2011. Assume a similar level of risk for Philip Morris
stock as for the typical U.S. stock. Show all work.
(b).
Using the data in Table 3A, calculate Philip Morris’ price/earnings ratio and the price/earnings
ratio relative to the S&P Industrials Index as of December 31, 2011.
(c).
Using the data in Table 3A, calculate Philip Morris’ price/book ratio and the price/book ratio
relative to the S&P Industrials Index as of December 31, 2011.
(d).
State one major advantage and one major disadvantage of each of the three valuation
methodologies you used to value Philip Morris stock in Questions a, b and c above.
(e).
State whether Philip Morris stock is undervalued or overvalued as of December 31, 2011.
Support your conclusion using your answers to previous questions and any data provided. (The
past 10-year average S&P Industrials Index relative price/earnings and price/book ratios for
Philip Morris were 0.80 and 1.61, respectively.)
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Table 1A
Oberyn Martell Incorporated: Financial Data for the Years Ending 31st December 2009 and 2013
2009
2013
$'million
$'million
542
979
38
76
Depreciation and amortization
3
9
Interest expense
3
0
Pretax income
32
67
Income taxes
13
37
Net income after tax
19
30
Fixed assets
41
70
Total assets
245
291
Working capital
123
157
16
0
159
220
Income Statement Data
Revenues
Operating income
Balance Sheet Data
Total debt
Total shareholders’ equity
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Table 2A
Valyria Incorporated: Actual 2008 and Estimated 2009 Financial Statements For Fiscal
Year Ending 31st December ($’millions, except per share data)
$’million
2,008
$’million
2,009
Change (%)
Revenue
4,750
5,140
7.6
Cost of goods sold
2,400
2,540
Selling, general, and administrative
1,400
1,550
180
210
Goodwill amortization
10
10
Operating income
760
830
20
25
Income before taxes
740
805
Income taxes
265
295
Net income
475
510
Earnings per share ($)
1.79
1.96
Average shares outstanding (millions)
265
260
Cash
400
400
Accounts receivable
680
700
Inventories
570
600
Net property, plant, and equipment
800
870
Intangibles
500
530
Total assets
2,950
3,100
Current liabilities
550
600
Long-term debt
300
300
Total liabilities
850
900
Stockholders’ equity
2,100
2,200
Total liabilities and equity
2,950
3,100
Book value per share ($)
7.92
8.46
Annual dividend per share ($)
0.55
0.60
Income Statement
Depreciation
Interest expense
8.4
8.6
Balance Sheet
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Table 3A
Westeros Corporation: Selected Financial Statement and Other Data for the Year
Ending 31st December ($’millions, except per share data)
2,011
$'million
Income Statement
Operating revenue
56,458
Cost of sales
25,612
Excise taxes on products
8,394
Gross profit
22,452
Selling, general, and administrative expenses
13,830
Operating income
8,622
Interest expense
1,651
Pretax earnings
6,971
Provision for income taxes
3,044
Net earnings
3,927
Earnings per share ($)
4.24
Dividends per share ($)
1.91
Balance Sheet
Current assets
Property, plant, and equipment, net
Goodwill
12,594
9,946
18,624
Other assets
6,220
Total assets
47,384
Current liabilities
11,824
Long-term debt
14,213
Deferred taxes
1,803
Other liabilities
7,032
Stockholders’ equity
12,512
Total liabilities and stockholders’ equity
47,384
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Other Data
Westeros:
Common shares outstanding (millions)
920
Closing price common stock
80.250
S&P Industrials Index:
Closing price
417.09
Earnings per share
16.29
Book value per share
161.08
-END -
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