CONFIDENTIAL, BAJJUN 2019/FIN658/665 ES UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : FINANCIAL STATEMENT ANALYSIS COURSE CODE FIN658/665 EXAMINATION JUNE 2019 TIME 3 HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of two (2) parts: PART A(1 Question) PART B (6 Questions) 2 ‘Answer ALL questions from PART A and PART B. Start each answer on a new page. 3 Do not bring any material into the examination room unless permission is given by the invigilator. 4 Please check to make sure that this examination pack consists of i) the Question Paper il) an Answer Booklet ~ provided by the Faculty 5. Answer ALL questions in English. DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of @ printed pages © Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BA/JUN 2019/FIN658/665 PARTA QUESTION 1 Grand ICT Bhd is a manufacturing company that produces computer parts since many years ago. The company is applying for bank loan (trade credit) from Eastern Bank Bhd. As a bank officer of Eastem Bank Bhd, you are evaluating the financial performance of Grand ICT Bhd for further recommendation during the coming Board of Directors meeting. Below are the financial information provided by Grand ICT Bhd for the financial ending December 2016-2018. Grand ICT Bhd Statement of Financial Position as at 31° December Assets 2018 (RM) 2017(RM) 2016 (RM) Cash 505,478 360,000 460,000 Marketable Securities 600,000 272,000 400,000 Accounts Receivable 3,700,000 1,740,326 1,960,000 Inventories 4,000,000 2,480,000 3,600,000 Plant and equipment, net 16,588,000 13,320,000 10,800,000 Total assets 24,393,478 18,172,326 17,220,000 Liabilities and Equities ‘Accounts Payable 1,580,000 1,600,000 1,900,000 Accrual Expenses 2,396,000 3,880,000 3,669,760 Long term debt, 10% 2,000,000 2,500,000 3,000,000 Common stock, RM1parvalue 4,000,000 2,000,000 2,000,000 Paid in capital 10,000,000 5,000,000 5,000,000 Retained earnings 4,417,478 — 3,192,326 1,650,240 Total liabilities & equities 24,393,478 18,172,326 17,220,000 Grand ICT Bhd ‘Statement of Financial Performance for the Year Ended 31* December 2018(RM) 2017(RM) 2016 (RM) Net Sales 17,710,000 16,100,000 14,000,000 Cost of goods sold 6,493,666 5,339,286 4,600,000 Gross profit 11,216,334 10,760,714 9,400,000 General expenses 8,180,334 6,941,072 5,280,000 Depreciation 779,400 666,000 $40,000 Operation profit 2,256,600 3,153,642 3,580,000 Interest expenses 200,000 250,000 + 300,000 Income before tax 2,056,600 2,903,642 3,280,000 Income taxes, 25% 514,150 725,911 820,000 Net income 1,542,450 2,177,732 2,460,000 © Hak Cipta Universit Teknologi MARA, CONFIDENTIALCONFIDENTIAL 3 BAJJUN 2019/FING58/665 Grand ICT Bhd Index Number Trend Series: Statement of Financial Position as at 31% December Assets 2018 (RM) © 2017(RM) 2046 (RM Cash 109.89 78.26 100 Marketable Securities 150.00 68.00 100 Accounts Receivable 188.78 88.79 100 Inventories 114.11 68.89 100 Plant and equipment, net 144.33 123.33 100 Total assets 141.66 105.53 100 Liabilities and Equities Accounts Payable 83.16 84.21 100 Accrual Expenses 65.29 105.73 100 Long term debt, 10% 66.67 83.33 100 Common stock, RM1 par value 200.00 100.00 100 Paid in capital 200.00 100.00 100 Retained earnings 267.69 193.45 100 Total iabilties & equities 141.66 105.53 100 Grand ICT Bhd Index Number Trend Series: Statement of Financial Performance for Year Ended 31% December 2018 (RM) © 2017(RM) 2046 (RM) Net Sales 126.50 115.00 100 Cost of goods sold 141.17 116.07 100 Gross profit 119.32 114.48 100 General expenses 154.93 131.46 100 Depreciation 144.33, 123.33 100 Operation profit 63.03 88.09 100 Interest expenses 66.67 83.33 100 Income before tax 62.70 88.53 100 Income taxes, 25% 62.70 88.53 100 Net income 62.70 88.53 100 Based on the financial information provided by Grand ICT Bhd, you are required: a) Using average value, calculate any two relevant financial ratios for each of the following areas to determine the financial performance of Grand ICT Bhd for the Year 2017 and Year 2018. The areas are as follows: i Ability to meet maturing obligations. ii. Effectiveness in managing assets and efficiency in handling operations. ili, Profitability and overall operating results. iv. Ability to service debts and degree of financial risk. (8 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 4 BA/JUN 2019/FING58/665 b) 4) e) Based on computed data in a) above, the financial statements and Comparative Index Number Trend Series Analysis provided, prepare a comprehensive financial report for Year 2018. Your discussion should include their liquidity position, effectiveness in managing assets, the degree of financial risks and overall profitability results, (12 marks) Prepare a Statement of Cash Flow for financial year ended 31% December Year 2018 (8 marks) Comment on the company cash flow relating to operating, investing and financing activities, (8 marks) Based on your previous findings in (a), (b) and (c), should Eastern Bank Bhd extend credit facilities to Grand ICT as requested? Provide at least two (2) justifications to support your decision. (4 marks) © Hak Cipta Universiti Teknologi MARA, CONFIDENTIALCONFIDENTIAL, 5 BAJJUN 2019/FINGS8/665 PARTB QUESTION 1 Briggstone Bhd is a vendor for one of the automobile industries that produces front and rear shock absorbers. Below are selected financial ratios of the company. Financial Ratios 2018 | 2017 | 2016 Net Profit Margin (%) 55 | 53 | 52 Assets/Equity (times) 24 | 26 | 27 EBIT/Revenues (%) a5 | 95 | 98 Gross Profit Margin (%) 214 | 214 | 216 Income Tax Rate (%) 305 | 305 | 305 Total Assets Turnover (times) 18 | 19 2 Inventory Turnover (times) 5.3 58 6.4 Accounts Receivable Turnover (times) 132 | 13 | 132 Fixed Assets Turnover (times) 18 | 184 [ 19 Using the information above and based on DuPont Analysis, calculate return on assets (ROA) and retum on equity (ROE) for all three years and and identify reasons for any changes. (10 marks) QUESTION 2 The following information is extracted from Pluto Corporation's financial statement relating to their operating activities for the financial year ending 30" June, 2018 2017 2016 Sales 669,640 705,680 715,280 Cost of Goods Sold 401,220 415,240 410,200 Gross Profit 268,420 290,440 305,080 Marketing Expenses 65,680 65,080 69,320 Research and Development Expenses 26,080 27,980 29,380 Other Operating Costs 101,780 101,080 96,620 Earnings Before Interest and Taxes 74,880 96,300 109,760 Interest on financing 31,200 24,000 19,000 Eamings Before Taxes 43,680 72,300 90,760 Taxes 10,920 18,075 22,690 Earnings after taxes. 32,760 54,225 68,070 ‘© Hak Cipta Universit Teknologi MARA CONFIDENTIALCONFIDENTIAL, 6 BA/JUN 2019/FIN658/665 As a financial analyst of Pluto Corporation, you are required to; a) Evaluate the company operating performance using a Year-to-Year Change Analysis. (8 marks) b) Write a brief report on the company’s operating performance for the year ending 2018. (2 marks) QUESTION 3 a) Hirev Capital Management Company's equity investment strategy is to invest in companies with low price-to-book-ratios. Hirev is considering investing in shares of either Azatel Company or Scollin Company. Below are the selected financial data for both companies. Selected Financial Data as of 31* December 2018 Azatel Company — collin Company Sales (RM) 25,500,000 22,200,000 Fixed Assets (RM) 6,840,000 6,600,000 Short-term debt (RM) 0 1,200,000 Long-term debt (RM) 3,240,000 3,000,000 Equity (RM) 7,200,000 9,000,000 No. of Shareholders Outstanding (units) 300,000 480,000 ‘Stock price per share (RM) 618 59.4 Based on the above financial data, compute for each company the Price-to-Book ratio, Total debt to equity ratio and Fixed-asset turnover. Select the company that meets Hirev Capital Management Company's criteria (4 marks) b) Alfa Company is a wholesaler of various types of agricultural machineries. You are analyzing their financial statement and noticed that accounts receivable turnover this year is significantly lower than prior year. Provide three (3) explanations that would be consistent with this observation. (6 marks) © Hak Cipta Universiti Teknologl MARA, CONFIDENTIALCONFIDENTIAL, 7 BAJJUN 2019/FIN658/665 QUESTION 4 Below are the details of inventory purchased for the Financial Year Ending December 2018. Month Purchases (Units) Total Purchase Cost (RM) January 380 8,740 March 420 10,500 April 460 11,500 June 250 6,500 July 500 14,000 October 400 12,000 November 360 11,520 December 250 8,500 Prior to Year 2018, 310 units of inventory were purchased at RM20 per unit. The total sales recorded were 2630 units and the selling price for each unit was RM36. a) Using FIFO and LIFO method, determine the i) costs of goods sold, ii) value of the ending inventory ili) gross profit margin (6 marks) b) Calculate the inventory turnover ratio for both methods. Identify which method is preferred if the company is concemed with sales effectiveness. (4 marks) QUESTION 5 On January 1*, Year 2019, you are considering the purchase of Libra Company's common share. Currently, the market price is RM17 per share. Based on the financial information below, i. Book value at January 1, Year 2019, is RM6 per share. ji, Predicted net income per share for Year 2019 through Year 2023 is RM3, RM3.50, RM3.80, RM4.00 and RM4.30 respectively. il, For Year 2024 and thereafter, predicted residual income is RMO. iv. Libra Company is not expected to pay dividends throughout the next five years period. v. The required rate of return (cost of capital (COC)) is 10 percent which is as follow; | Year 1 2 3 4 5 Rate of return or COC 0.909 | 0.826 | 0.751 | 0.683) 0.62 (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 8 BA/JUN 2019/FIN658/665 a) Using residual income valuation model, determine the intrinsic value of Libra Company's common share as of January 1* Year 2019 (round your answer to 2 decimal places). (7 marks) b) Based on your answer in (a) above, do you want to buy Libra Company's share? State your reason, (3 marks) QUESTION 6 Famaria Bhd has been in agricultural business since three years ago. The demand for the agricultural products showed an increasing trend year after year. Therefore the company decided to evaluate its financing needs for the coming business expansion commencing January 1%, 2019. For a financial year which ended 31% December 2018, Famaria Bhd had RM15 million in sales with its net income after tax of RM1.5 million. The company anticipates that next year sales increase by 30 percent, while its net income after tax will rise to RM3 million. Given its Present growth rate, the firm will declare a cash dividend of 25 percent. ‘The CEO of Famaria Bhd predicts that the company's current assets, net fixed assets and current liabilities for Year 2019 will increase by 30 percent from its current amount. However, the long term debt, common stock and paid-in capital remain unchanged. Famaria Bhd’s Balance Sheet as at 31% December 2018 is as follows Famaria Bhd ‘Statement of Financial Position as at 31 December 2018 Assets Current assets 4,800,000 Net fixed assets 7,200,000 Total assets 12,000,000 fies and Owners’ equity Current liabilities 3,000,000 Long term debt 4,000,000 Common stock 2,000,000 Paid-in capital 1,800,000 Retained earnings 1,200,000 Total liabilities and owners’ equity 42,000,000 @) Based on the above information, determine Famaria financing needs for the financial year ending December 31*, 2019. (6 marks) b) If the company decide to meet their financing through debt, determine the solvency level of the company. (4 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknologi MARA, CONFIDENTIAL