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# 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

9 900. and r in the valuation equation.6 5.7 Et 74.6 18.2 81.8 million.4 PV of CV -99.3+5.1% for 2011 and .1 -13.6 18. RI2010 .3 dt 18.021 = −162.2−718.021 .2 2012 respectively. C 2010 2011 2012 2013 2014 2015 718.3)−5. r−g Hence.7−80.034.4% × BVt−1 . 10.0 1.2 − 0.3 − 17.3 = 0. This corresponds to E2011 = 3.0 = 601.43 × 23. one obtains 838.8 84. D Reverse engineering is applied to the valuation formula: VE = BV2010 + RI2010 ×(1+g) .2 -9. BV2010 .2−718.2 = 8.4.5 87.1% and 86. Rearranging terms yields EP S2011 = 35.5 -5.47 = 35.6 18.73%.104−.2 BVt RIt PV of RIt -17.03 × RIt .Alternative solution: forward P/E ratio equals share price divided by forecasted earnings per share for 2011.6 18.6 1.0573 = 5.3 5.90/EP S2011 . that is. Et = RIt + r × BVt−1 and BVt+1 = BVt + Et − dt .104 − g Rearranging terms yields g = 0. one first needs to calculate RI2010 . E 2010 2011 2012 718. 2 = 8.92 million. It holds that RI2010 = E2010 − r × BV2009 . Differences with the solution above are due to rounding errors.47 = 3.7 it follows that RI2010 = 74.2 80.5 CV -162. 0.0 Observe that RIt = Et − 10.2−74.6 79.6 18.2.3 × (1 + g) .104(838.7 = 5.43. growth in earnings equals 80.5 5. BVt = BVt−1 + Et − dt and that CV = RI2015 ×(1+g) r−g = −13.3 + 5. Substituting VE = 838.90/10. Hence.2 86.3.3 838. Firm value then equals VE = 718.6 BVt RIt Observe that RIt+1 = 1.1 966.3 779.2×1.2 76.3 836.2 = 718.6 18.3 776.2 80.104 × 662.9 -1.2 74.0 Et 74.9 848.3 = 79.6 18.7 dt 18. Using that BV2009 = BV2010 + d2010 − E2010 = 662.5 − 99.

0% × (122 − 3 − 49) = 20 5 May also be classified as financing income 3 .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. 2 points have been subtracted for each misclassification or forgotten item. 8.Question 3 (25 points) A maximum of 9. B. respectively. A Reformulated income statement Revenue 5. and 8 points can be earned for parts A.0% × (269 + 32 + 115) = 116 2 Taken from equity statement 3 May also be classified as other operating income 4 28. and C.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 28.912 Operating expenses (5.

4 .

243) Reserves 490 Common shareholders’ equity 560 5 .437 Retained earnings (2.135 Operating liabilities: Trade and other payables 1.B Reformulated balance sheet (June 30. 2010) Operating assets: Goodwill 852 Intangible assets 336 Property.669 Financial liabilities: Derivative financial liabilities 27 Borrowings 2.458 Total financial liabilities 2. plant and equipment 899 Investments in joint ventures and associates 149 Trade and other receivables 556 Inventories 343 Total operating assets 3.578 Current tax liabilities 136 Provisions 38 Deferred tax liability 7 Total operating liabilities 1.759 Net operating assets 1.485 Net financial obligations 816 Share capital 876 Share premium 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.

286 − 218 = 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. For completenes sake. 068. 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. plant and equipment 261 Purchase of intangible assets 183 Proceeds on disposal of property. 6 .0% × (156 − 57) = (28) Net interest paid 71 From this it follows that C − I = 1. 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: 28.634 Taxation paid (320) Tax benefit on net interest paid (28) Net cash from operating activities (C) 1. 068 = C − I.C Cash flows from operating activities: Cash generated from operations 1.

6. and 7 points can be earned for parts A. This means that Radioshack has to repay this debt in 2011.6)/(0.5 ∗ 639.8)/0. 676.5 ∗ 627. 2 points have been subtracted for each calculation error. 7 . 6.5 ∗ 1. B It holds that P M sales = 234.2 − 2.6/4.3 + 0.3) = 21.0%) = 21.7 = 5.1) = 2. 472.83 C For the SF3 forecast it holds that ReOI2011 = (CoreRN OA2010 − rF ) × N OA2010 .67% so that ROCE = RN OA + F LEV × (RN OA − N BC) = 14.7/(0. It is needed to forecast ReOI for the years 2102 and beyond.0% F LEV = (0.5 ∗ 1. Note that the growth rate in NOA is not needed for the 2011 forecast.1) = 14.67 × (14. B.5 + 0. 048.5 ∗ 1.8 + 0.7% + 0.5 ∗ 842.7% N BC = 25.8% RN OA = (234.2/4.3) = 0. respectively. 048. So.3 + 0. 482.8 + 0.5 ∗ 639. 676.5 ∗ 842. 472.7% − 4.1/(0.86% 3 points have been subtracted if you did not use yearly average values.24% P M other OI = −2. \$ 308. the additional information required is the cost of operations rF (presuming that CoreRN OA is core operating income from sales). C.5 ∗ 1. 482.5 ∗ 1.8) = 4.5 ∗ 627.06% AT O = 4. A It holds that ROCE = 206.7 = −0.0 is reported in current maturities of long term debt.5/(0. 472. and D.Question 4 (25 points) A maximum of 6.5 ∗ 1. D Two important observations can be made: – In 2010.5 + 0.

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 .– Even though Radioshack made a profit in 2010. retained earnings decreased considerably in 2010.