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CONFIDENTIAL
BM/JAN 201 2/Ft N658/665

UNIVERSITI TEKNOLOGI MARA


FINAL EXAMINATION

SUGGESTED ANSWER SCHEME

COURSE FINANCIAL STATEMENT ANALYSIS

COURSE CODE FtN658

EXAMINATION JANUARY 2012

TIME 3 HOURS

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b) calculate some relevant ratios that would be useful to : ( 6 marks)

Leverage 2008 2009 2010


Debt Ratio 64.91o/o 78.27% 71j5%
DebVequity 1.2 t.J I 1.13
Times Interest Earned 9.17 -1.34 O,YJ

Profitability 2008 2009 2010


Gross Profit maroin 30% 20Yo 30.90%
Operating profit marqin 19.56% 20.260/o 21.82o/o
Net Profit marqin 5.83o/o -1.93% 4.7804
Return on assets 2839% -7.59Yo 17.630/o
Return on equitv 80.91% -25.39 61.110

c) Statement of Cash flows

Net profit after taxes 2,626


Depreciation 737
Accounts Receivable (72)
Inventories (1,296)
Accounts payable (1 ,196)

Accrued expenses 994


1,793

Gross fixed assets (1,630)


(1,630)

Notes payable 1,000


Dividends (1 ,051)
(51)

Net Cash Flow 112 i


Beginning Cash 571 1

Ending Cash AR?


_1
Units 14

Marks
Per unit 0.43

Major uses arise from investing and financing activity and it is financed by operating activity.
This company spends a lot on purchase of fixed assets for its investing activity and malor
outflow in financing is Dividend payment. Major inflow is the fund from operation, which refer to
net income and depreciation. Increase in accrued expenses and notes pavable also contributes
additional sources to company. (4 marks)

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Part B

QUESTION 1

a) What are the main differences between credit analysis and equity
analysis? How do these impact
the financial statement information that is important for each type of
anilysis

' Credit analysis supports the lending decision. As such, credit analysis involves
whether a company will be able to meet financial obligations over a giuen
determining
time horizon.

' Equity analysis supports the decision to buy, hold, or sell a stock. As such,
equity analysis
involves the identification of the optimal portfolio of stocks for wealth maximizition. (
at
lecturer discretion) (8 marks)

b) Express the following income statement information in common-size percents


and give comment
on the performance. of !h" company's income and expenditure and suggest two (z)
recommendations for future improvemenr

2009 2010
Sales 100% 100o/o
Cost of goods sold OO-/o 52.4%
Gross Profit u% 47.6%
Operating expenses 21% 19.4%
Net Income 13% 28.2%

Company sales in ringgit were declined in 2008. This may due to the shrinking of the market
shares' However, the COGS were dropped tremendously to 53.4% in 2010 from 66% as for 2009.
This result can increase in Gross Profit of 47.6% as compared to 34% in 2006. In regard to the
operating expenses, the difference was not really significant, but Net Income was increased of
more the double of the net income in 200g.

Strategies for future improvement - should increase their market share by using aggressive sales
promotion and introducing new product line, continue with cost leadership, improve their operation
efficiency. (14 marks) (At lecturer discretion)

QUESTION 2

a) Income Statement for Piling Rainbow Corporation for year ended 3111212010

2010 (RM)
Sales 222,000
COGS 133,200
Gross Profit 88,800
Sales & Admin 22,000
Depreciation 20,000
EBIT 46,800
Interest 8,000
EBT 38,800
Tax(20%) 7,760
Net Income 31,040

P/S Div 2,000

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QUESTION 3

Junior Box Corporation

i) Book value per share = ( 1000 _ 450 _ 2SO ) t2O =RM15 (2 marks)

Earnings per share =150120 (2 marks)


=Rft/7.50
ii) Economic value added method (Note. other methods are acceptabre)

2010 2011 2012 2013


EPS 7.50 8.85 10.44 |/ .1/
DPS 2.25 z.oo 3.13 3.70
Beqinninq BV 15.00 .{o
21 28.50
Ke x Beq BV 2.25 3.18 4.28
EVA o.ou 7.26 8.04
PVEVA 5.74 5.49 5.28
16.51
'PVEVA
Endino BV 15.00
Intrinsic Value 31.52

since the intrinsic value RM 31.52 is more than the market value RM30.00, the stock is
worth buying.
(12 marks)

iii) EPS indicated the income earned by each share of shareholders for a specific financial
year' However management can easily manipulate EPS by changing the number of shares
outstanding. Therefore it is not a significant factor to determine ihe stoct< is good. On the
other hand, PE ratio is the measurement of the relationship between companies's or
aggregate stock market's stock price and earnings. lt is also called earnings multiplier.
(4 marks)

QUESTION 4

a) Assume you are given the following relationship for the Brain Corporation :

Sales / TotalAssets 1.5 times


Return on Assets 3o/o
Return on Equity 5%

Calculate on the Brain's profit margin and debt ratio.

ROA = NPMXTATO
NPM = TATO/ ROA = 1.5 I 3o/o = 2o/o

ROE = ROA X Equity multiptier


5oA =3%xEM
EM = 1.67, therefore
DR =Asset-Equity/Asset
= 1 - 1/equity multiplier
=1-111.67=40% (5 marks)

Based on the Du Pont equation, what should be done to ensure the firm success
particularly to have a higher ROE?

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Part A

Question

a) Prepare a year-to-year change analysis for ihe year 2009 and 2010 for Sonar Dana Company
Berhad.

2009 20'10
Cash & Marketable Securities (26) 4.36% 112 19.61%
Accounts Receivable 137 7.84% 72 3.82Yo 0.5
lnventories 662 32.42%o 1,296 47.93Yo
Net Fixed assets 1,070 16.98% 893 12.12Yo
(t h
TotalAssets 1,843 17.25Yo 2,373 18.94%

Accounts payable 1,288 194.56% (1,196) -61.33% /'r a

Notes payable 184 13.98% 1,000 66.67%


Accrued expenses 998 217.90o/o 994 68.27%
Long-term debt 400 8.89% 0 0.00% ntr
Common stock@RM0.50 0 0.00% 0 0.00% n6
Paid in capital 0 0.00% 0 0.00% r'r q

Retained earnings (1,027) -58.69% 1,575 217.84Yo nA


Total liabilities and Equities 1,843 17.2504 2.373 18.94Yo
6 marks
SONAR DANA COMPANY BERHAD
Income Statement for the vear ended 31 December 2008, 2009 and 2010

2009 2010
Sales (2,636) -5.07o/o 5,636 11.42Yo n4
Cost of goods sold 3,091 8.49Yo (1 ,491) -3.78o/o
Gross profit (5,727) -36.71To 7,127 72.190/o nq
Operating expenses (170) -1.670/0 2,000 20.00% 0.5
Depreciation (70) -'10.00% 107 16.98% 11 4

Earnings before interest and


tax (5,487) -'116.00% 5,020 -663.14% 0.5
Interest expenses 49 9.50% 50 8.85%
Earnings before tax (5,536) -131.37o/o 4,970 -375.95%
Taxes (1,550) -131.36% 1,392 -376.22%
Net profit after taxes (3,986) -131.38fo 3,578 -375.840/o 0.5

Dividend (1,13e) -93.82% 976 1301 .33% rc.5

Retained earnings (2,847) -156.43% 2,602 -253.36% 0.5


6 marks

(12 marks)

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d) Based on the comparative analysis, prepare a report to reveal the overall performance of Sonar
Dana Company Berhad. Give some recommendations to overcome any flaws in the company
performance ( you may use other financial analysis tools to support your explanation)

Refer to financial result; we can conclude that Sonar Dana sales increase from 200g to 2010,
from -5.06% to 11.42o/o but COGS decrease by 3.78%. Therefore, gross profit increase by
72.2% in 2010. GPM also increase from 2009 to 2010 but only by a small % which is from 20%
in 2009 to 30% in 2010.

Operating income increase tremendously in 2010 by 663.28%. This due to the lower % increase
in operating expenses and deduction in depreciation which is only 20% and 16.98%
respectively. Although the expenses and depreciation increase from 2009 to 2010 but the
increment is still low compared to the increment in gross income.

Company interest expenses decrease by 8.85%. This is due to decreasing company rely to LTD.
Sonar Dana had increase in its Notes Payable in 2010 which is 66.70/o. However, company still
manages to earned high EBT which us 376.02o/o. In addition, the company ability much better
from 2009 to 2010, increase from -1.34 times to 6.93 times. This shows that the company is
good in paying their debt.

By looking at the company balance sheet the larger portion of increment are from retained
earnings and notes payable. Sonar Dana Net Fixed assets by 12.12o/o, as the fixed assets
increase, depreciation also increase by 16.98%. Both CA and CL increase but CL increases at
higher % than CA which is 134% compared lo71o/o. This lead to drop in liquidity position in the
company.

Notes payable increase by 66.67% from 2009 to 2010 and accrued expenses also decrease
from 2009 to 2O1C from 217% to 68.270/0. This shows that this company rely more on short term
liabilities than LTD. This is not a good strategy to the company since the company may face
difficulties in paying debt later. Therefore, company should not more rely on short term liabilities
to prevent problem in liquidity position

Based on profitability, we can conclude that this company managed to get low margin, due to
heavy use of debt, increase interest charges.

Overall from the analysis of the company from the comparative and financial ratios. The
company needs to be more careful in managing their current assets and current liabilities.

Recommendation:

This company should not only focus debt financing to finance their assets due to DR Company
more than 50%. lt shows that this company relies on debt; therefore this company should
change to equity financing. Company should controlling their expenses, and able to get high
profit.
(At lecturer discretion-'1 6marks)

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CS Dividend 8,400
EACS 29,040
EPS 0.2904

Balance Sheet for year 3111212010


2010 (RM)
Cash 10,000
A/Receivable 16,500
Inventory 27,500
Other current assets 12,000
Plant 235 000
Depreciation (16,000)
TotalAssets 285,000

A/payable 15,000
Notes payable 10,000
Bonds 50,000
C/stock 100,000
Retained earnings 110,000
Total liabilities & equity 285,000 (8 marks)

b) Market to book value and price earnings ratio

M-to-BV ratio 11.90 Mkt Price=25 BV=210,000 BVPS=2.1

PE 86.09 Mkt price=25 EACS=29,040 EPS=0.2904


(4 marks)

c) lndex and Tend Analysis for Investment and Financing Decisions

2008 (RM) 2009 (RM) l&T Analysis for 2009


Cash 10,000 10,000 1 00.00
fuReceivable 15,000 16,500 1 10.00
Inventory 25,000 27,500 I'10.00
Other current assets 2,000
1 12,000 100.00
Net Plant 200,000 219.000 1 09.50

TotalAssets 262,000 285,000 108 78


AJpayable '12,000 15,000 125.00
Notes payable 20,000 10,000 50.00
Bonds 50,000 50,000 100.00
C/stock 100,000 100,000 100.00
Retained earnings 80.000 1 '10,000 137.50
Total liabilities & equity 262.000 285,000 108.78
(4 marks)

Comments are at lecturer discretion (4 marks)

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a) should have a good management over firm's cost and expense
b) efficient utilization of the firm asset
c) Reasonable usage debt financing, so that the firm can still meet its debt obligation
even during a bad times'
(3 marks)

b) How much common stock did Chip Cookies repurchase lasi year?
Cash at the end of the year RM155,000
Cash at the beginning of the year (75,000)
Change in cash 80,000

CF from operation + CF from investing + CF from financing = A in cash


RM1,250,009 + 1 RM1,000,000) + CF from financing = RM80,000
CF from financing = RM80,000 -RM1,250,000 + 1,000,000
CF from financing =(RM170,000)

CF from financing = Long term debt + A common stock - dividend


(RM170,000) = RM250,000 + A common stock - ( RM25,000)
A common stock =RM170,000 - RM250,000 + 25,000 =( RM395,000 )
(6 marks)

i) Based on the Chip Cookies pattern of cash flow, determine which categorized fit the best:
Growth and rapidly expanding company or towards insolvency and bankruptcy company or
infant company. Justify your answer.

The best category that fit best for the cash flow statement of Chip Cookies - slow expanding ,

old but stable company- this company have a positive operating due to high operating
income, negative investing due to slow growth activity, negative financing due to repurchase
common stock, dividend payment. At lecturer discretion
(6 marks)

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